Thursday, June 29, 2006

The Dual Road to Trading Success

By collecting hard data on our trading--metrics on the average size, holding time, and number of winning/losing trades; performance under different market conditions, etc.--we work on developing our market edge and we work on our ability to consistently exploit that edge. Knowing what we're doing and how well we're doing it tells us what we're doing right (so we can do more of it) and what we're doing wrong (so we can make improvements). We have patterns of success and we have patterns of failure; the challenge is identifying and understanding these and using them to spur improvement.

"Trading success is a function of possessing a statistical edge in the market and being able to exploit this edge with regularity. Trading failure is most likely to occur when you trade subjective, untested methods that possess no valid edge or when you are incapable of consistently applying edges that are available. Improving your psychology as a trader by itself will not confer an objective edge. Developing or purchasing a valid trading system will not in and of itself make you a great trader. The development of trading methods and the development of yourself as a trader thus must proceed in concert. You are only as good as the methods you implement and your ability to implement the methods."

The Psychology of Trading, p. 295

2 comments:

yinTrader said...

Hi Brett

I quote:
"Trading success is a function of possessing a statistical edge in the market and being able to exploit this edge with regularity."

If we look at trading as a probability game, this dual road to trading success may be on our side, focusing on long term results rather than individual trades and using a proven plan that has an edge.

Would this bring trading success if we integrate the Probability Mindset?

Brett Steenbarger, Ph.D. said...

Yes, thanks for that observation. I think that focusing on longer-term results rather than individual trades is crucial. Even when you have an edge in your favor, it is possible by chance to have a run of several losing trades. If such runs cause us to abandon our (proven) methods, we are truly lost!

Brett