Friday, March 05, 2010

Questions for Your Trading Business

A while back, I published a useful set of self-evaluation questions for traders. Here are a few more questions to help guide your development:

1) What specific goals did you work on this past week in your trading? What progress did you make?

2) What setups/patterns account for the majority of your profits? Have you actually assessed this?

3) What is the greatest source of losses in your trading? How are you addressing this?

4) How do you prepare for the trading day? How consistent are you with the preparation?

5) How do you know if you're taking the right amount of risk in your trading? How do you control risk? How do you maximize reward?

6) Based on the amount and consistency of effort you put into trading, do you feel that you deserve to be successful? Would someone with the same degree and consistency of effort be successful in other endeavors, such as sports or performing arts?

7) What do you do that is unique as a trader, that would lead to unique and positive results?

Your answers to these questions will speak volumes about your trading business and how well thought-out that business is.


dsorense56 said...

Ouch! This calls me back to all the things I failed to do.

Adam said...

Brett ~

Thank you for posting seven key questions we traders should be asking. You’ve addressed these themes before, individually and in various combinations; it’s wonderfully helpful to see them here together. Thank you.

My own experience is that the scarier a question is, the more relevant it is. Along that line I’d like to ask question eight:

Are you making money?

On its surface this seems quite simple: “I’m up for the year,” or, “I’m not.” Yet, we can perform a simple calculation that adds depth to our answer, one traders seem to avoid ~ as I myself did when first starting out.

The S&P closed on January 2, 2009 at 931.80, and closed, after the great swoop down to March 9, on December 31, 2009 at 1115.10: a gain of 16.44% on the year.

Had I passively invested my trading stake in that index, that’s the return I would have earned ~ without putting in a single hour of work.

Let’s rephrase question eight:

Did actively trading my stake beat the S&P?

If not ~ even if I was up for the year ~ I put in many hours churning my stake for the benefit of others and a relative loss for myself.

If I did beat the S&P, it is only the marginal difference between the passive return of 16.44% and my relative return that could in any way be attributable to my work. Even a portion of that would, statistically, be accounted for by randomness or luck.

Let’s imagine that my trading stake is $100K, and that I achieved an annual return of 20%. In any year this would be a healthy number. Yet, if we subtracted the passive return from that resulting $20K, we’d be left with only $3560.

How many hours did I work to earn that $3560, and thus how much did I earn per hour? If I worked ten hours per week for 48 weeks (I assume everyone takes some time off), reading, modeling, putting in screen time to buy and sell...

... I made $7.42 per hour.

Perhaps it is through the lens of this simple exercise that we can now revisit your seven key questions and profitably explore our answers.

Adam Sterling.

Matt Fahmie said...

Dr. Steenbarger

I have an additional question to add to this post
"Am I using the correct trading vehicle
to make the best use of my trading strategy?"

I have been struggling with making this
decision lately. Any advice?