Thursday, June 05, 2008

The Trader as Manager: Implications of Quality and Trading

The last post took an initial look at quality control in trading. This stemmed from my realization that even relatively disciplined traders (including myself) pursue markets with a level of standardization that would be unthinkably low in the business world. One of the factors that has made a Toyota, Starbucks, or McDonald's so successful is that quality is controlled, across people and settings, day after day and year after year. That requires an unusually high level of managerial planning and oversight.

Trading is often described as a business, and traders are encouraged to treat their trading as a business. Many writers talk about the importance of business planning in trading. But if traders are to truly treat their work in a businesslike fashion, they need more than planning. They need to serve as the managers of their businesses. The maintenance of quality is one important facet of that management.

If we think about trading in quality terms, we want to identify the inputs into trading decisions, the processes by which decisions are made, and the outputs from those decisions. Inputs can be defined by the information that we need to process to make our best decisions. Processes involve information processing itself, including our ability to maintain a mindset conducive to optimal decision making. The outputs from trading decisions include the orders that we place, our management of those positions, and the profits that accrue.

The first sign of quality control problems in trading is lack of consistency. Inconsistency of inputs reflects variability in our preparation: sometimes we're more prepared for trading--we've done more and better homework--than other times. Inconsistency can also be present in our trading processes: variability in our state of mind while trading and our following of rules. Inconsistency often first shows up in trading outputs: variability in profitability, but also variation in how we size trades and take profits and losses.

If a trader truly operated as a business, he or she would identify "best practices" and turn these into standard operating procedures, with careful managerial oversight to ensure that these procedures are followed. Few of us truly know our best practices, however. It is impossible to implement quality if we have not made ourselves objects of our own study.

It is important to be one's own trading coach, but successful sports teams need managers as well as coaches. Writing out a business plan is the easy part. Managing that plan over time and becoming as consistent as a Toyota: that's a challenge. More on this aspect of working on oneself to come shortly.


Blueprint for an Uncompromised Life


Ana said...


It is interesting that you draw the parallel of trading with any business venture.

As QC is practised in any business especially in manufacturing, so in trading, we need all the somatic markers and biofeedbacks to maintain QC to become successful in trading, which is also an enterprise.

The reason why a small nation like Singapore with no natural resources could compete and succeed is based on our belief of Quality Control in all we do.

Melancholy Korean said...

Great post. What I like most about Toyota is their commitment to kaizen. That commitment and your earlier blog post about an "uncompromised life" remind me of a fantastic quote by Gasset:

Let us recall that at the start we distinguished the excellent man from the common man by saying that the former is the one who makes great demands on himself, and the latter the one who makes no demands on himself, but contents himself with what he is, and is delighted with himself. Contrary to what is usually thought, it is the man of excellence, and not the common man who lives in essential servitude. Life has no savor for him unless he makes it consist in service to something transcendental.

Hence he does not look upon the necessity of serving as an oppression. When, by chance, such necessity is lacking, he grows restless and invents some new standard, more difficult, more exigent, with which to coerce himself. This is life lived as a discipline—the noble life. Nobility is defined by the demands it makes on us—by obligations, not by rights. Noblesse oblige.