Friday, September 11, 2009

Continuous Quality Improvement in Trading: The Value of Elaborating Your Trading Process

If you look at successful manufacturing companies, such as Toyota and Honda, you'll find that they understand their production processes very well. They keep a close eye on quality and intervene quickly should they deviate from their own quality standards. That enables them to produce products, year after year, that are surprisingly free of defects.

Trading is far more fuzzy than manufacturing, but I think it still helps to view ourselves as profit factories. We take certain inputs--the data we collect on ourselves, the research we produce, the preparation for market days--and transform those into outputs measured in profits and losses. To the extent that we are consistent in our "best practices", we can maximize profitability and minimize our own defects.

I see it in my own trading as well as that of traders I work with: the process is too loose, too open to random, subjective inputs. We will be swayed by something we hear or read; we will become so locked in an idea that we miss important market data. Worst of all, we will produce defect after defect and continue the assembly line of trading.

You cannot double down on your processes and tighten them up if you don't know what they are. Only by reflecting on your best trading and dissecting your best decisions can you figure out how you do what you do when you are at your best.

In coming posts, I will be elaborating my own trading process, as much for my own development as to aid others. My goal in this is not to provide a template for how to trade; each trader must arrive at their own. Rather, the goal is to illustrate and stimulate how continuous quality improvement can apply to something as fuzzy and discretionary as trading.