Sunday, November 09, 2008

Learning to Trade: Viewing Yourself, Reviewing Your Trading

In a recent post, I emphasized that much of the development of trading expertise is a function of pattern recognition and the ability to act upon patterns promptly in real time. A classic example of performance by pattern recognition is the development of competence and expertise among radiologists. Reading an x-ray or other form of imaging means being able to detect normal variations from abnormal ones. In the beginning, to the untrained eye, most medical images will look alike. Only with repeated exposure to images and their variations will medical students learn to make and rule out diagnoses. No amount of book work can substitute for learning at the bedside and reviewing film with experienced physicians.

The trader who video records his or her trading has a powerful tool for accomplishing three learning tasks:

1) Seeing more market patterns and cementing those more firmly in mind;

2) Reviewing performance to assess areas of trading that need more work and to formulate goals for such work;

3) Reviewing performance to assess areas of trading that represent strengths, so that these can be crystallized and recruited during future trading.

When I left my full time work with proprietary traders in Chicago and began working with bank and hedge fund traders, I was surprised by the sophistication of the latter group in terms of portfolio management and equally surprised by that group's utter lack of feel for short-term market movement. Many times, a portfolio manager would describe an excellent idea to me and then execute it at the absolute worst time of day. I realized that, as savvy as the institutional traders were, they lacked the frequency of exposure to short term market patterns and hence had no real "feel" for when buyers or sellers were dominating (or losing their dominance) from minute to minute, hour to hour.

Traders who use video recording in essence double their exposure to market patterns--and to their own patterns as traders. Because pattern learning is a function of the number of repeated exposures to various configurations, the trader who not only views markets, but also reviews them, is more likely to enjoy an accelerated learning (and performance) curve.

The two most common means of recording that I've encountered in my work with traders is desktop video (software that records your screen) and actual video recording with a camcorder pointed at the screen. The former is available through programs such as Camtasia; the latter is best accomplished with a camcorder that includes a large hard drive.

Of course, it doesn't make sense to review the entire trading day, every trading day. In general, the best reviews come from your best trades and your worst: those will cement what you do right and what you need to improve. If traders only reviewed their single best and worst trades each day--what the markets did and what they did--I suspect they would be more likely to achieve competence, and would do so in less time than the trader who packs it in at the market close.

Remember, however, research suggests that it is not just what you review but how that makes all the difference in learning. The most powerful learning takes observations and turns them into concrete goals for future observation. Passive watching of markets (and one's own performance) is much less powerful than active watching and goal setting.


SSK said...

Hello Brett, Your last paragraph is very important. When I was doing my written journal, I had goals set for the month and tried to focus on them. My performance increased. Now that I have most of the kinks in screen recording worked out, and feel a bit more comfortable in narrating, I am going to get back to my Brief therapy, and set goals for my exits. With the review of the video's and a still chart next to the replay, you can clearly see many things, and exits are clearly a weak point. I got away from my Brief therapy goals for a bit, but when I was actively setting goals, and grading them with a 5 point scale, I could see from month to month overall improvement. (I worked on the goal until I attained at least a "C" I could only get to a C+ on a scale of 1-5 (5 is a "A", 1 is a "F") Having graded every trade in the context of where the market moved in relation to what I was working on, as an example, if I was working on entries and the market moved from the low to the high, and I bought in the bottom 5th of that range, I got a "A". If I bought at the low, and the market moved against me and I got stopped out for a loss, I got an "F", if my entry was in the middle of the range that became apparent after the fact I got a "C" etc. For the most part over many trades with the smoothing affect of greater numbers in the data set, gave me a very good look at real performance change. I worked on entries and reversals. I managed to go from a "D" to a "C+" over about 3 months of trades for each goal. I am going to start back up and work on exits. I will write an article and create a page on the site for that work, explaining in more detail the grading and goal setting, and incorporate the link in the "A Great Day Trading series", so that I can remember and see real time how I am executing that specific goal, work on that goal for 3 months, and have the grading of each trade linked to each recording, (or something like that) Should be a really good synergy, as it worked well with the written journal in the past. Keep up the great work, Best, SSK

Tyro said...

Just FYI, there's a free, open-source alternative to Camtasia called Camstudio. I've got no affiliation with them but I have used their product before and it works perfectly well for recording trading sessions. If people are reluctant to try something, "free" can help get them in the door :)

CharlesTrader said...

Some interesting statistics from "Brain Rules" by John Medina showing that pictures are a superior memory tool over oral and written presentations:

"Tests performed years ago showed that people could remember more than 2500 pictures with at least 90 percent accuracy several days post-exposure, even though subjects saw each picture for about 10 seconds. Accuracy rates a year later still hovered around 63 percent."

"If information is presented orally, people remember about 10 percent, tested 72 hours after exposure. That figure goes up to 65 percent if you add a picture."


Globetrader said...

Actually that's a comment to ssk...

You wrote: "if I was working on entries and the market moved from the low to the high, and I bought in the bottom 5th of that range, I got a "A". If I bought at the low, and the market moved against me and I got stopped out for a loss, I got an "F",...."

You seem to trade a kind of retracement system. The market moves to a low, turns, you enter and ride it up again. You get an "A", if you enter in the first 5th of the range, but you get an "F" if you enter at the bottom and get stopped.

Actually your entry at the perceived bottom is the best entry of all. You have the highest risk:reward ratio, if your entry parameters, which define the temporary bottom for you are present.

If the market goes up, as suggested by your trade plan you are the hero, but if it goes against you, you are the worst of all losers? That's, sorry to say it clearly: Bullshit.

The entry is worth your "A" grade regardless of the outcome of the trade. You have no holy grail system, you have no magic bullet and you can't become the magic trader with just winning trades by giving yourself an "A" when you win and an "F" when you fail.

The entry is worth an "A" when your trade entry signal is given and you take it.

The trade execution is an "A" when you use a narrow stop, because you enter at the perceived bottom and just a small movement against you tells you, the trade is not working and you should go flat or reverse the trade. Of course it remains an "A" when you hold it through the trading swings until it reaches say 80% of the actual range.

It took me a long time to let go of the loser feeling in a losing trader, but that feeling is only warranted if you keep a losing trade against all odds. If everything in you tells you to go short but you remain long just because you happen to be in that trade.


Brett Steenbarger, Ph.D. said...

Thanks for the links and insights!


Gustavo's Trades said...

Brett, my performance has increased once I started documenting all my trades with screenshots. I keep both the intra-day trades and longer term option positions documented on my blog. It serves as my journal and allows me to review what I'm doing right and what needs improving.

Needless to say, I started doing so after reading your blog and book. So, once again, thank you!

I am intrigued by the idea of video recording and might try that as well.

Here is the portuguese translation:


Brett Steenbarger, Ph.D. said...

Thanks, Gustavo; I just linked your work in my evening briefing for July 1st.