Sunday, November 15, 2020

Three Essentials For Your Trading Reviews

On Wednesday (11/18/20), Mike Bellafiore of SMB Capital and I will hold a trading review meeting with SMB trader Max Ganik as part of the Money Show program.  (Free registration here).  Max has come a long way in his short trading career, so it will be an interesting opportunity to see how a successful developing trader reviews his trading--and how he makes use of mentoring and coaching to make best use of his reviews.

There are three elements that I find essential in my own trading reviews:

1)  Did I have a sound trade idea? - I make a firm distinction between the idea that I am trading and the actual trade that expresses that idea.  For example, I have talked about how I view markets as expressions of linear, trending movements and multiple cyclical elements.  A big part of the ideas I generate consist of locating dominant cycles within trends and then buying cycle lows during rising markets and selling cycle highs in falling markets.  (See here and here for examples).  What makes a good trade idea in my trading is the lining up of directional and cyclical elements across time frames.  For other traders, a sound trade idea may come from fundamental analysis or from insight into an event that is likely to be a market catalyst.  In my review, I ask myself whether the idea I traded was sound or whether I allowed extraneous influences to bias my view.  If, indeed, I was biased, then eliminating that bias becomes a very explicit goal for the next trading session by requiring myself to verbalize the idea and rationale for the idea prior to placing trades based upon the idea.

2)  Did I trade the idea well? - It's not enough to have a good idea to succeed in markets.  We need to translate that idea into a sound risk/reward proposition.  Because the presence of cycles and trends occurs at all time frames, I can zoom in to very short-term price action and use shorter-term cycles to locate good places to enter longer-term trends.  I also monitor relative volume in real time to obtain a sense for how far the market might move during the course of a day.  (In SPY, for example, daily volume and trading range has been running a correlation of about .80).  How much volume we're doing today relative to recent days provides me with an estimate of price targets that we are likely to hit.  The shorter-term cycles also tell me levels that we should not break if the trend indeed continues as I expect.  My sizing of the position is designed to make that downside tolerable.  A portion of the position will be taken as relatively quick profits if the short-term cycles are extended in my favor; a smaller portion of the position will be left to run to the daily price target if volume continues to be supportive.  If I identify a rotational market, I may express my trade idea by buying the strongest sector of the market or selling the weakest one.  All these elements are part of reviews that note where I could make improvements in the implementation of my ideas--and those improvements become part of goals for the next trading day.

3)  Did I manage myself well? - I've learned that I need to have my life in order if I am to trade well.  That means being rested with quality sleep and energized with exercise; it also means that I have dealt with personal issues well and am not carrying frustrations and unfinished business into my trading.  Flexible focus and concentration are important to my developing and implementing sound trade ideas, which means that I need to actively work on staying calm and open-minded.  My ideal mindset when trading is similar to the ideal mindset for a surgeon.  I don't want to be fatigued or distracted, and I also don't want to be pumped up and overeager.  I've learned from hard-earned experience that using trading to get emotional needs met is a path to disaster.  For the surgeon, it's all about following the right protocol and making decisions with a clear mind.  The right mindset is process-focused, not caught up in recent or future outcomes.

Everyone's trading is different, so what goes into your three categories will be unique to your  best trading.  But if you're tracking the quality of the ideas you're generating, the quality of the ways in which you're trading those ideas, and the effectiveness of your self-management, you will have established a powerful framework for deliberate practice and self-improvement:  things your future self will thank you for!

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