Monday, December 15, 2014

Three Ways to Achieve Better Trading Results for 2015

The recent post outlined a way of setting goals for the new year based upon a breakdown of key elements of trading process.  Two mistakes that traders can make in such a review are 1)  the comfortable inaction of casually reviewing without taking the next steps of setting concrete goals and steps toward reaching those and 2) the tackling of too many goals at one time, diluting efforts to fully work on any of them.  My experience is that selecting a very limited set of highest yield goals--no more than three--and working on those intensively produces the best outcomes over time.

So if you are limited to a couple of trading goals for the new year, what might they be?  Here are some areas where I find traders need the most work:

Generating better ideas - Looking at 2014, most traders can find plenty of missed opportunities.  Many times the opportunities are missed simply because we were not focusing on the right markets or the right stocks in the right time frames.  Improving our data set--looking at more things in different ways--is an important step in feeding our pattern recognition.  Reading fresh perspectives from knowledgeable writers and speaking with insightful traders similarly can fuel our creative thinking.  One of my goals for 2015?  I've chosen the Abnormal Returns site as a source of readings and podcasts and will hold myself to keeping a daily Evernote journal of market-relevant ideas.  Indexing those ideas over time should produce a valuable database for future reference.

Better risk management--and opportunity management - It helps to look at the tails of your P/L distribution.  Do fat tails on the left side--outsized losses--hold your overall returns down?  That is a challenge for risk management:  sizing positions appropriately, utilizing reasonable stops, ensuring that multiple positions are sufficiently uncorrelated, using options rather than cash where prudent, etc.  On the other hand, are you missing fat returns on the right side of that P/L distribution?  Cutting opportunity short can significantly weigh upon overall returns.  Plotting your P/L for each trade and looking at the shape of the distribution will tell you a great deal about your management of risk and opportunity.  

Better entry and exit execution - It doesn't show up in the P/L stats directly, but looking at how your trades performed after you entered and after you exited will give you some idea as to whether your execution is adding value.  Too often traders will chase market moves and enter at bad levels and/or puke out of trades on noise and exit prematurely.  A review of market paths following recent entries and exits can identify those problems.  No one should hold themselves to buying the low tick and selling the high one.  Overall, however, you should be aware of the heat you take on trades once you enter and the amount you leave on the table when you exit.  My goal for 2015 is to be quicker at entering good ideas with at least a small position.  Too often I've become perfectionistic about entry levels, missing good portions of good trades. 

Everyone likes to identify the next big trade, the can't fail setup.  It's like throwing the long pass for a touchdown.  In reality, however, the game is more often won by the unsexy blocking and tackling:  gathering information to generate better ideas, managing positions better, and having clear and useful entry and exit criteria.  Work on trading process is the best way to achieve better trading outcomes.

Further Reading:  What Works in Goal Setting