Sunday, June 01, 2014

Accelerating the Learning Curve - Part Two: Creating Learning Processes

The first post in this series highlighted the role of reflection in learning.  But how can we achieve such reflection and sustain it over time?  I have spoken with many traders who start journals and drop them, only to pick them back up when trading becomes difficult.  Clearly that is a suboptimal learning process.

Worthwhile research from Staats and Upton suggests that manufacturing firms are not the only ones that can benefit from lean processes.  Even in knowledge fields, simple and direct processes that are grounded in objective observation can yield meaningful improvements.  Key to their findings is the recognition that effective process changes must be implemented at the lowest possible level of the organization.  If you want to manage inventory better, you need robust processes that can be set into motion by those doing the receiving and stocking of merchandise.  Similarly, for the individual trader, effective processes must be conducted from the front lines:  as part of routine daily preparation for trading, not as part of an abstract, high-level quarterly review.

The problem with much trade journaling is that it is long on observations, short on process.  It is one thing to observe that you are not being sufficiently patient in your trade selection; quite another thing to define and implement a repeatable process of trade selectivity.  When Spear and Bowen studied the Toyota Production System, they found that a key to its success was the combination of open experimentation and rigorous implementation and measurement.  In other words, workers were encouraged to generate creative solutions, but then each proposed solution was tightly controlled as a variable to objectively determine its value.  This rigorous creativity turns lessons into processes.  

From this vantage point, reflection is necessary but not sufficient for the acquisition of expertise.  Backing creative reflections must be rigorous applications of one's conclusions.  If we think of traders as engaged in a Profit Production System, then mapping each step of the trading process, identifying where problems occur, brainstorming improvements, and rigorously testing those makes considerable sense.  What I have found among successful traders is that each *has* such a production system, though in many cases those systems are as much implicit as explicit.  Not infrequently, good coaching consists of helping traders follow their own (implicit) production systems.

As suggested earlier, many efforts to learn trading fall short because the absence of integrated mentorship and coaching means that learning itself is not part of a production system.  To maximize learning in any performance domain, there must be routine observation and reflection, structured efforts at improvement, and scorekeeping to determine whether those efforts truly resulted in improvement.  Once learning becomes a process rather than an occasional event, adapting to changing markets occurs far more naturally, in real time.

Consider two traders:  One trades daily, makes notes in a journal, and occasionally sets goals based on those notes.  The other also trades daily, but actively makes use of a trading platform that allows for market replay to review the trading day bar by bar and examine what went right and wrong.  That platform also summarizes performance statistics, so that there are objective measures of improvement--and need for improvement:  number of winning vs. losing trades; average profit per winning trade and loss per losing trade; average drawdowns; time spent in winning vs. losing trades; etc.  Which trader, over time, is more likely to experience a supercharged learning curve?  Which is more likely to take the hard lessons of trading and use those to define and refine robust learning and trading processes?

There are trading platforms out there that can serve as useful learning platforms.  Ones that come to mind include Ninja Trader, TradeStation, MultiCharts, and TradingTechnologies.  I reviewed Ninja Trader back in 2009 and will take a fresh look later this month.  And, of course, if you know of other trading resources that facilitate learning, by all means feel free to mention those in comments to this post.

So let's conclude with a few questions:  If an airline maintained its aircraft with processes as rigorous as your trading processes, would you feel comfortable flying?  If a surgeon practiced surgery with processes as robust as your trading processes, would you want him/her in the ER operating on you?  If an automobile ran as reliably as your trading, would you purchase it?   

The sober truth is that most traders do not lack profitability because of lack of emotional control or an absence of discipline.  They lack profitability because they have not yet developed a production system that reliably generates profits.

Further Reading:  The Value of Trading Metrics


Market Monkey said...

Brett, I have to respectfully disagree with the following:

"The sober truth is that most traders do not lack profitability because of lack of emotional control or an absence of discipline. They lack profitability because they have not yet developed a production system that reliably generates profits."

I believe that most people have "production system[s]" that are profitable- in trading and in life- when employed objectively. It's the "lack of emotional control or [...] discipline" that renders the system unprofitable.

Our emotional variance cancels out the positive effects of an otherwise profitable approach.


David Ayer said...

Another great learning feature of the integrated trading platforms (I like TradeStation) is their programmability. Building anything in software requires you to specify it fully with excruciating detail. Writing indicators that express market ideas allows you to compare their output visually with price so you can "see" the ideas in action. Developing trading strategies in software pushes you to think more deeply not only about setups but also entries, exits, position sizing, etc. You get to see the signals on the charts, play with thresholds, investigate performance, etc.

Ovidiu Susan said...

MM ... emotional control is nothing more than an important, distinct part of that production system. You do not have a reliable production system if emotional control is not addressed from within the system.

Brett Steenbarger, Ph.D. said...

Excellent point, Ovidiu: Performance success in any field requires work on oneself as well as one's craft--and working on oneself through one's craft.


Market Monkey said...

Ovidiu, I completely agree :). I was going to add that after my last line but wanted to leave the emphasis on the fact that, regardless of emotional control being a "part of that production system" the emotional control is still a factor.

When Brett says that most traders do not lack profitability due to lack of emotional control or a lack of discipline but rather a lack of a production system, it misleadingly gives the impression that they are two separate entities when in fact the emotional control is an integral (and, as you pointed out, crucial)part of any production system...

So, when I said, "I believe that most people have "production system[s]" that are profitable- in trading and in life- when employed objectively. It's the "lack of emotional control or [...] discipline" that renders the system unprofitable." I failed to underline that what I meant was the technical component of the overall production system is usually established and robust, it's the emotional component that is often responsible for the failure of the whole.

In short, the "not yet developed [...] production system" is that way precisely because there is a "lack of emotional control".

Brett Steenbarger, Ph.D. said...

Excellent point, Market Monkey; thanks. Once there is a robust production system, emotional factors do indeed play a meaningful role in determining the consistency with which that system is implemented. The presence of emotional control won't turn an untrained person into a world class golfer or surgeon, but the lack of emotional control can derail the golf play or surgery of even world-class professionals!