My favorite form of performance review is also my most painful. Every year I complete my income taxes--by hand. That means that I write out every single trade that I placed during the year in chronological order, along with its profit/loss (P/L). This past year, that meant reviewing approximately 240 trades, roughly one a day.
Yes, there are ways of capturing this information electronically to avoid the hand-numbing task of writing each transaction, but I choose the old-fashioned method. Writing the trades out makes me reflect on them: "What the hell happened here?" and "What was going on in the market then?" Writing the trades makes me sensitive, not only to their P/L, but to their sequencing: How many runs of winners and losers did I have? How far did I draw down during the year? How well did I trade after I had a losing period? What happened following winning periods?
Other important questions that arise during the income tax exercise have been: How many winners and losers did I have? Did that change over time? What was the average size of my winners and losers? How did the size of my largest winners and losers compare?
Such review is a powerful learning mechanism. Recall the world-class trader I recently described. I'm convinced his daily reviews have helped him make that movement from competence to expertise.
So why do so few traders conduct such intensive reviews?
Quite simply, it really is painful. Every mistake--every lapse of judgment and discipline--is laid bare. Too, the review starkly reveals how successful or unsuccessful you truly were. Such review forces us to face the question: What was the return on my investment of time in trading? I suspect many traders would rather not know. They'd rather comfort themselves with vague assurances that they're "working on things" and "learning". They prefer filling out a few emotive lines in a journal and calling that review.
But with the pain comes gain. My past reviews found that a handful of large losing trades were greatly reducing my P/L for the year. No longer. I became so disgusted looking at large losing trades that I simply cut them out. Out of 240 trades in 2006, none lost anywhere close to 1% of my total trading capital. My largest drawdown the year--from equity peak to trough--was on the order of 2%. I was profitable, not because I made so many great trades, but because I stopped losing. And I stopped losing when I started hating losing. And I only *really* hated losing when I had to write it down, face myself in the mirror, and truly feel the pain and disgust with how I was interfering with my own success. That emotional connection is critical to the process of change.
You'll never hear me prattle about positive affirmations and turning positive images into reality. It's the hard, painful looks in the mirror that have brought me progress as a trader. Maybe that's why I've always admired alcoholics who truly work their AA programs, conducting fearless moral inventories and making amends for their pasts. I also admire the soldier who stands steadfast before his commanding officer's critique and responds, "No excuse, Sir!", with resolve to rectify mistakes. I respect companies like Toyota that scrutinize every weakness of their production processes; bodybuilders that relentlessly focus on each muscle group for development; and NASCAR pit crews that meticulously film and review each stop, in hopes of shaving a mere fraction of a second from routine maintenance.
In times of peace, Nietzsche wrote, warlike individuals turn upon themselves. They create their own discomfort...and thereby generate the motivational thrust for new rounds of self-improvement.
They find their gains in pain.
Posts
