Thursday, August 03, 2006

Becoming an Agent of Continuous Learning

Note: I will be on the road from today through the weekend and will not be posting the usual market updates on the Trading Psychology Weblog during that time. I will, however, continue to post to TraderFeed, including a basic market summary.

Much of my morning routine before the market open consists of looking at what has made the recent market distinctive. Perhaps it's an extreme indicator reading or an unusual pattern of price change. Whatever that distinctive element is, I then look back in market history to see what has characteristically occurred following that event. That, many times, gives me a clue for the market's overall direction during the coming day. I then track volume flows trade by trade and minute by minute (as outlined in my recent post) to see if large traders are indeed trading in the direction anticipated by my historical study. When those factors--historical tendency and reading of the tape--are in line, that is when I will take a trade.

My performance, as a result boils down to three elements:
  1. Strategy - aligning my trade with historical odds;
  2. Tactics - aligning my trade with volume flows for the day;
  3. Execution - using a reading of large trader behavior to obtain good prices on entry and exit and using position sizing and stops to ensure that I take equal, moderate risk on all trades.

Breaking down my performance that way allows me to more readily see where I have gone wrong in trading and what I'm doing right. I've recently hit personal equity curve highs, and it is amazing how much of this profitability has been determined by #3. Your particular strategy (source of overall market edge), tactics (ways of exploiting that edge from day to day), and execution (position management) may be much different from mine, but breaking down your performance into these categories may help you see your strengths as a trader (so you can maximize them) and your weaknesses.

Military units conduct after-action reviews to identify what went right and wrong with a recently completed mission. Coaches will review game tapes with players to work on strengths and weaknesses. Traders can do the same by grading themselves on strategy, tactics, and execution. It's part of becoming an agent of continuous learning.