Thursday, August 03, 2006

Becoming an Agent of Continuous Learning

Note: I will be on the road from today through the weekend and will not be posting the usual market updates on the Trading Psychology Weblog during that time. I will, however, continue to post to TraderFeed, including a basic market summary.

Much of my morning routine before the market open consists of looking at what has made the recent market distinctive. Perhaps it's an extreme indicator reading or an unusual pattern of price change. Whatever that distinctive element is, I then look back in market history to see what has characteristically occurred following that event. That, many times, gives me a clue for the market's overall direction during the coming day. I then track volume flows trade by trade and minute by minute (as outlined in my recent post) to see if large traders are indeed trading in the direction anticipated by my historical study. When those factors--historical tendency and reading of the tape--are in line, that is when I will take a trade.

My performance, as a result boils down to three elements:
  1. Strategy - aligning my trade with historical odds;
  2. Tactics - aligning my trade with volume flows for the day;
  3. Execution - using a reading of large trader behavior to obtain good prices on entry and exit and using position sizing and stops to ensure that I take equal, moderate risk on all trades.

Breaking down my performance that way allows me to more readily see where I have gone wrong in trading and what I'm doing right. I've recently hit personal equity curve highs, and it is amazing how much of this profitability has been determined by #3. Your particular strategy (source of overall market edge), tactics (ways of exploiting that edge from day to day), and execution (position management) may be much different from mine, but breaking down your performance into these categories may help you see your strengths as a trader (so you can maximize them) and your weaknesses.

Military units conduct after-action reviews to identify what went right and wrong with a recently completed mission. Coaches will review game tapes with players to work on strengths and weaknesses. Traders can do the same by grading themselves on strategy, tactics, and execution. It's part of becoming an agent of continuous learning.


DrFox said...

Dear Brett,

Fantastic post. I kinda try something similar, but I am still learning to read the tape.

If there is a subliminar message to everyone in your post, it is that profit will not come easy, but hard work alone will not make it, you have to combine it with inteligence and strategy.

Have a nice trip. :)

Brett Steenbarger, Ph.D. said...

Thanks, DrFox; you've definitely picked up on the right message. Hard work is necessary, but not sufficient. It's all important to find an objective edge in the marketplace.


Zentrader said...

Yes, I agree.Doing a daily inventory of my trades has helped me see exactly what I am doing right and what I am doing wrong.I post these at my new blog,
Thanks for all the info you post on your blog.
Joseph Forsyth

Brett Steenbarger, Ph.D. said...

Thanks Joseph for passing along your blog URL and for your post. I will definitely check out your blog; I like the idea of using it as a learning tool. "What can I learn from my trading today?" has been an attitude that has greatly helped me in recent weeks, as I've returned to regular trading. It's amazing how much you can quickly internalize through steady, consistent review.


yinTrader said...

You hit the nail on the head, Brett!

Following from your strategies, keeping and reviewing our journals would also contribute to continuous self education.

Brett Steenbarger, Ph.D. said...

Yes, I think you're right. Journals are most helpful when they're structured as learning exercises. The two things I always like to enter into a journal each day are what I did right during the day (and want to continue doing) and what I did wrong (and want to improve). That simple exercise, with follow through each day, produces a cumulative learning that is quite impressive over time.

Thanks for the note--