Sunday, January 21, 2018

Resources for Developing Your Trading Playbook

Mike Bellafiore makes frequent reference to traders' "playbooks".  For a basketball or football team, a playbook is a set of plays that the team runs in various situations.  The playbook guides practices, so that each team member knows their role in each play and executes it perfectly.  The playbook also provides ways for the team to exploit vulnerabilities in the other team's defense.  Every team has multiple plays in their playbook to find ways of scoring.  Much of the skill of a coach is knowing which plays to call when.

Having worked with developing traders for many years, I've come to appreciate the paths that lead to success and those that fall short.  Successful traders, I find, start with small, focused playbooks and work at becoming proficient in just a few types of trades.  They document their plays in journals, trade them in real time, and review action at the end of the day to see what they might have missed.  Only when they become proficient at a few basic plays do they move on to exploit other ways of making money.

I consistently find that the intensity of the learning process--the cycles of viewing, doing, and reviewing--is associated with greater trader success.  We develop expertise by internalizing what we learn.  In every performance endeavor, the greats spend more time practicing skills and rehearsing performance than in actually performing.

It's common among active traders to think of playbook trades as "setups", as in chart patterns, but this is shortsighted.  A playbook trade consists of several components:

*  A pattern of market behavior that has led to favorable market returns over a defined time horizon;

*  A set of rules for identifying this pattern in real time and entering the trade at a point that provides favorable reward relative to risk;

*  A set of rules for sizing the trade, so that the trader can achieve meaningful returns without running the risk of ruin when, by chance, a series of losing trades occurs;

*  A set of rules for establishing target prices and adding to positions/scaling out of positions/exiting positions;

*  A set of rules for establishing the stocks or instruments best able to exploit the patterns being traded.

When the trader merely views the playbook trade as a set of entry criteria, they leave themselves no guidance for sizing the trade and managing the risk/reward of the position.  How trades are sized and managed is every bit as important as the trade ideas themselves.  When we rehearse playbook trades, we work on all the components of the trade.  That includes what we're trading.  So often, I find that the most successful traders are those that find the best vehicles for trading their playbooks.  At the end of 2017, I saw traders succeed phenomenally trading the crypto-related stocks.  Had they traded exactly the same patterns in the large cap universe, they would have made far less money.

So how does a trader know what should go into his or her playbook?  In every performance domain, from athletics to chess to medicine, we see mentoring as a key resource for development.  We learn what to do and how to do it from people who are already successfully involved as performers.  This is why so many trade occupations are structured as apprenticeships.  Learning by trial and error alone is too inefficient--and costly.

Fortunately, there are many vehicles for apprenticeship, from the training programs at investment banks to junior analyst positions on hedge fund trading desks to the training offered at proprietary trading firms.  Thanks to the online medium, we're seeing quite a few chat rooms serve the developmental function.  Several of these appear below:

The Art of Trading - Education and live trading with Stewie, including a blog site;

Asenna Capital - Training and trading, including chat room, with perspectives from Assad Tannous.

Dan Zanger - Chat room and real time education based upon chart patterns of promising stocks, with tweets by Dan on opportunities they're tracking.

EminiPlayer - Large archive of videos and live chat room with focus on the e-minis and trade planning around Market Profile, hosted by Awais Bokhari.

Investors Underground - A team of traders offer real-time training and support in a chat room format coordinated by Nate Michaud. They sponsor the excellent Traders4ACause events.

SMB Capital - Merritt Black runs a futures based chat room; Seth Freudberg runs a training program for options traders; and SMB holds training classes and events based upon the patterns traded at their prop firm, including a large archive of videos.

There are many other great services out there; check out this review; this post on resources for traders; and this post on technical analysis resources.

Note that each of these services comes at a cost, both of money and time/effort.  Considerable due diligence is needed to ensure that what they are teaching is what you want to learn.  The right sites will role model playbooks and how to trade those.  What you add is the review and practice that helps make those patterns and rules your own.  The best services accelerate your learning curve; none of them can substitute for that learning curve.