Wednesday, February 25, 2015

Best Practices in Trading: Elaborating Your Trading Processes

Who are we as traders?  The reality is that we fill many roles and engage in a variety of activities.  It's rare to find traders who work diligently on becoming better traders.  It's even more rare to see traders break down what they do into components and work on bettering themselves in every one of those.

Today's best practice comes from Pier Luigi Pellegrino from Paris, France.  He breaks down trading into four basic areas and then breaks down each of those into two sub domains and each of those into three specific performance elements.  This creates a catalog of 24 performance functions of trading.  Pier explains, "The daily trading routine is focused on a structured and regular implementation of the...24 performance elements."

Here is Pier's breakdown:

1.  Vision (The Fund Manager)

1). Focused Vision - create regularly the images of the financial goal to achieve
2)  Intensity of Purpose - feel with intensity the will to succeed and the expectation to win
3)  Intrinsic Motivation - being driven from within to reach high standards of performance

4)  Self Efficacy - act with self confidence and self efficacy and belief in winning
5)  Rage to Mastery - sustain the conviction of being an elite performer driven to reach mastery
6)  Implicit Action - execute the trading strategy by accessing implicit and intuitive knowledge

2.  Strategy (The Portfolio Manager)

7)  Portfolio Ranking - scan, select, and rank the best trend stocks with the proprietary screening tool
8)  Pattern Monitoring - monitor price action and pattern development among the filtered stocks
9)  Setup Recognition - detect playbook setups through implicit pattern recognition

10)  Risk Analysis - perform due diligence and risk analysis of potential trades
11)  Capital Allocation - determine the capital allocated to the trade (shares and stop level)
12)  Trading Frequency - trade only the best setups with the greatest opportunity

3.  Execution (The Head Trader)

13)  Mental Toughness - develop a strong and competitive mindset
14)  Rituals - replicate consistently a structured and coherent daily routine
15)  Zone State - enter on demand a zone state of focus and concentration during trading

16)  Trade Implementation - execute the trade flawlessly with clarity and intuition
17)  Order Management - utilize adaptive exit tactic with trailing stops and profit targets
18)  Performance Niche - focus relentlessly on your strategy and discard other methods

4.  Feedback (The Performance Coach)

19)  Performance Training - train key performance skills with structured deliberate practice
20)  Mental Rehearsal - isolate, rehearse, and integrate critical skills and optimal behaviors
21)  Laboring Instinct - develop a mindset of continuous improvement and skill refinement

22)  Continuous Debriefing - Debrief, monitor, and measure performance
23)  Performance Diagnosis - Detect factors limiting performance and enhancing success
24)  Feedback Implementation - Correct weaknesses and repeat winning actions

Now your breakdown of trading process might look different from Pier's (mine would be heavier on research processes and--ironically--less geared toward sustaining positive mindset), but the principle still holds:  dividing trading into component actions enables you to look under the performance hood and observe what you're doing well and what could stand improvement.

Indeed, a breakdown such as Pier's 24 performance functions could anchor an effective end of day or end of week report card that could anchor goal setting the next day or week.  That would be a best practice that embraces best practices!

Further Reading:  The Rage to Master