Saturday, January 10, 2015

Best Practices in Trading: Conducting Trading Reviews

Deliberate practice is a process in which we continually evaluate performance and use those evaluations to make targeted efforts at improvement.  Research from Anders Ericsson and others suggests that deliberate practice is essential in developing performance expertise.  Today's best practice comes from reader Norbert Beckstrom and consists of a daily review of trading performance.  The power of such a review comes from the fact that it can anchor a process of continuous learning and performance improvement.  Here are the questions Norbert puts to himself after a day's trading:

1)  Did I put on high probability (A+) trades that I wouldn't be easily scared out of?
2)  Did I trade to win or did I trade not to lose?
3)  Did I have enough size in my conviction trades?
4)  Did I break any of my rules?  Why?
5)  Was I mindful of what I was doing?
6)  How many of today's trades would I make again under the same circumstances?
7)  How many of my trades did I bail on before the stop or profit target?  How did that work out?
8)  How many of my trades today were placed out of fear of missing a move?
9)  How many trades did I miss today because I wasn't paying attention or was working on something else?
10)  How many doubles were there that I didn't have an edge for?
11)  How do I feel about my trading at the end of the day?  
12)  What can I do to improve these answers?

Norbert adds that if he conducts this review in the morning before the market open rather than in the evening at the end of the trading day, the answers are more likely to be fresh in his mind and he's more likely to avoid making trading mistakes.  In that sense, his review process is a mindfulness process. 

Clearly, Norbert's review is geared to a discretionary day trader.  Traders with different trading styles and traders working on different trading issues will have very different review lists.  My review, for example, is much more about markets and much less about making emotional errors.  Because my trades are based upon backtested rules and relationships, my first hypothesis is that a losing trade means I may well have missed something important and idiosyncratic in the market.  This prods me toward further market analysis.  Should the trading loss result from not following my rules, that would prod me toward further self analysis.

Ultimately, the most important question is Norbert's final one.  Answering the questions is only useful to future performance if the answers anchor specific plans and actions toward improvement.  Review is necessary for deliberate practice, but not sufficient.  It is what we *do* with the answers to our review questions that determines whether our experience turns into learning and development.

Further Reading:  The Rage to Master