Friday, November 14, 2014

The One Trading Drill That Can Most Improve Your Trading Performance

In response to the post on training as the missing ingredient in the development of traders, an inquiring reader asks:  "Can you please offer us from your own experiences as a trader and as a traders coach some ways to practice, some drills or what ever you think is suitable, to help us evolve as traders?"

It's a very good question, because it highlights that, before we can intensively drill skills, we have to clearly identify the specific skills that comprise our best trading.  Those skills will be different for a relative value trader of rates, a directional global macro trader, and a daytrader of stocks.  Just as soccer players will have different drills from basketball players and gymnasts, longer-term investors will benefit from different rehearsal than shorter-term traders.

Understanding how you make money precedes any formal structuring of deliberate practice.  In an upcoming post, I will address a general process for achieving self-understanding.  I do, however, want to respond  concretely to the reader's query, because it speaks to the need to translate ideas about performance into daily practices that make a positive performance difference.

So what is the one thing you can do to improve your trading right now?

Imagine that you could eliminate the one worst trading practice that you have observed in yourself over the past month or two.  How much difference would that make to your overall profitability?  In many cases, the return on investment for working on eliminating that one worst practice would be very high.  Indeed, it can make the difference between profitability and drawdown.

Once you identify that one worst practice, you want to clearly map out the situations in which it occurs.  What is happening in markets at those times, and what is going through your mind at those times?  What are you thinking?  Feeling?  In other words, you want to become as aware of the "setup" for your trading mistakes as you are about trading setups:  you are focusing on your patterns now, not just market patterns.

The result of your reflection should result in an actual map:  a flow chart that captures the sequence of events leading to the bad trade.  For example, the sequence might start with getting out of a trade because it has hit your stop; then seeing the trade return to the original intended direction; then thinking and fearing that you have missed another opportunity (again!!); then chasing the move at a bad entry point; and then stopping out again on a normal retracement.

In that sequence, you now want to insert an additional set of steps that will derail the pattern and prevent the poor trading practice.  Your negative pattern is trading reactively based on the frustration of potentially missing a market move.  Your additional steps will be, following a stop out, to take a quick break from screens, regulate your breathing, and review your planned criteria for any re-entry.  In other words, you are mentally rehearsing your rules for good entry execution and planning any possible return to the position, rather than staring at the screen and fretting that you're missing a move.

Taking a loss ====> Fresh planning 

That is the new pattern you will be "drilling".  You are creating psychological conditions in which the poor trading cannot survive.  Mentally rehearsing the new pattern and actually enacting it in trading creates a highly focused deliberate practice.

So here's the process:  1) identify your one worst trading practice; 2) map the sequence of events (internal and external) leading to that worst practice; 3) insert into the map a set of steps that will make that worst practice impossible; and 4) mentally rehearse and then actually enact the new, inserted steps in your trading.

It is not necessary to change many things all at once.  Intensive work on changing the single pattern most responsible for your poor trading creates positive changes that will energize future focused efforts.  Most of us, once in a while, trade like idiots.  Targeting those occasions and slimming down the left tail of returns can make a huge difference to overall profitability.

Further Reading:  Drills for Intraday Trading