Thursday, November 06, 2014

How to Become a Peak Performance Trader

Thanks to Bella at SMB for pointing out this excellent article on getting better at getting better across multiple areas of performance.  As the author of the article points out, "Today in sports, what you are is what you make yourself into.  Innate athletic ability matters, but it's the base from which you have to ascend.  Training efforts that forty years ago would have seemed unimaginably sophisticated and obsessive are now what it takes to stay in the game."

The article refers to this high performance trend as "the mainstreaming of excellent habits".  Because conditioning, practice, and training are now routine aspects of many performance activities, the average level of ability has risen significantly in recent decades.  As Mark McClusky points out in his book Faster, Higher, Stronger, this has created a competitive landscape in which many tiny, continuous improvements compound to create world-class success.

The heart of successful performance improvement is constant measurement of processes and outcomes and frequent feedback to performers to facilitate learning.  Consider an example from the article:  athletes wear special training goggles that temporarily interfere with their vision while they perform a computer task.  This trains them to adapt to situations in which vision becomes hazy and make the right, rapid responses.  It's a small, focused improvement but, combined with many other small, focused improvements, it makes the difference between good and great.

Continuous performance improvement in trading begins with the collection of informative metrics.  Metrics can reveal our patterns of success and failure; they can also anchor goal-setting for improvement.  My experience is that trading is more like teaching in the U.S. and less like athletics, in that the collection of detailed metrics is rarely undertaken in a systematic way.  Take a very simple example:  Many traders enter a trade with a particular size and add to the position as it goes their way.  Does this entry execution, over time, add value or detract compared to entering all at once with a larger, standard size?  Does one method of entry execution work better in higher volatility vs. lower volatility markets?  In breakouts from ranges vs. ongoing trends?  

The point is that most traders don't know the answers to these--and so many similar--questions.  The difference between one approach to entry execution and other might amount to a few basis points of return per trade.  Consider, however, that the same could be true of exit execution, position sizing, and holding periods.  Cumulatively, seemingly small and mundane changes in money management can easily make the difference between profitability and looking for a different line of work.

Here's another example:  When many traders have an idea (go long stocks; buy the dollar), they express their view with a particular index or currency pair (SPX, EUR/USD).  Suppose, however, the view was expressed across multiple indexes or currencies.  How would that affect performance over time?  What if the view was expressed with the index or currency displaying the highest relative performance at that time?  Would this enhance or detract from results?  Few traders gather the data needed to answer these questions.

Meanwhile, computers can test all of those possibilities.  A good system designer can make a small, meaningful performance improvement in a matter of hours.  This enables systems to adapt and learn from experience, while the average discretionary trader relies on untested rules and embedded traditions.  

The bottom line is that if you're a performance athlete of trading, you have to spend as much time studying yourself and your performance as you spend studying markets.  It's no longer enough to get better haphazardly.  The peak performers are those who keep getting better at getting better.

Further Reading:  Trading Goals and Improvement