Friday, December 13, 2019

Three Improvements You Can Make In Your Trading In 2020

I recently met with traders at SMB Capital regarding their goals for the new year.  Here are three things that emerged from those conversations that traders can profitably focus upon for 2020:

1)  Become more consistent in your trading - This means relentlessly keeping score on what you're doing.  We can't improve what we don't measure.  How many up and down days/weeks/months do we have?  Are we making more on our up periods than our down ones?  Are we taking less heat on our trades?  Are we making more money per unit of risk that we're taking?  Are we taking the right amount of risk?  Which types of trades are giving us our best returns?  An important principle is that consistency in trading should precede growth in risk-taking.  Another important principle is that our best and most consistent trading reflects our greatest personal and trading strengths.  Becoming more consistent as a trader means doing a better and better job of accessing the best within us.

2)  Grow your trading - If your best trading is in liquid markets and strategies, you most likely have room to grow the sizes of your positions and expand your rewards.  This is easier said than done, because it's easy to anchor ourselves in the dollars that we make and lose.  If we're accustomed to losing only a thousand dollars or so during a day, growing our risk-taking and risking many thousands of dollars can feel intimidating.  Out of that intimidation, it's easy to stop doing the things that justified the initial sizing bump.  That is why growing our trading should be done gradually and steadily, so that we're always expanding our limits, but never overwhelming ourselves.  It is very common that, when hedge fund managers get more capital, they deploy it in ways that vary from their strengths.  In the excitement of getting more capital and being able to make more money, they stray from what they do best.  Growing your trading means expanding your risks and rewards--and doing so in a way that preserves your consistency.

3)  Grow your edge - In this video with Mike Bellafiore, he and I emphasize the need to expand what we do in markets.  Success comes from having multiple, independent ways to make money.  Any single edge in markets has a limited shelf life.  Ongoing success requires digging and finding new ways to exploit market patterns.  This is the area that trips up most traders.  They spend so much time watching screens and focusing on trading that they neglect the research and development time needed to discover new ways to succeed.  It's like a pharma company that spends all its time selling a good drug and not developing a robust pipeline of new medications.  Eventually the drug goes off patent and the company no longer has an edge in its market.  This is why working in teams--in close collaboration with others--can be so valuable.  We learn from others--their successes and failures--and can synthesize that learning into our own understandings.  If we're not working on new sources of edge, we're actually working on becoming obsolete.

A good business plan for the new year will have concrete goals in each of these three categories and specific plans for how to achieve these goals.  A good business plan will also be accountable, with ways of tracking whether we're actually making progress on those goals.  Every single goal should have a dedicated spot on your calendar each day/week.  Goals become part of our psychology when they regularly guide our lives.

Further Reading: