4 Fast Fixes That Pay Off Immediately
11/20/2013 8:00 am EST
Usually, a "quick fix" implies fixing something, but only temporarily and in a fashion that won't help long term. Luckily for us traders, there are several quick things that we can do that can readily improve our trading.
These are quick lessons in that they don't take much time to grasp, but their impact will be profound and make a huge difference in your results long term. Some of these ideas I discussed at the beginning of the 2012 in "8 Things to Improve Your Trading in 2012", but that doesn't make them any less relevant!
1) Understand Risk/Reward, Not Money
In trading, especially daytrading, it is quite tempting to think just in terms of money. We can think of how much we expect to make from a trade or on a per-day basis. Ultimately, this creates problems in our trading.
We get so focused on a certain dollar figure that we forget the key lesson: take what the market gives you. If you're trying to make $50,000 a day and the market conditions are not there, then you are going to stretch into marginal trades or just take too much risk in general. By taking too much risk, you are actually more likely to undermine your dollar-figure goal.
How do we know what the market will give? We evaluate trades based on risk/reward. If the potential risks don't justify the reward, then we don't enter the trade.
For instance, if your position size is too big and the slippage would cause undue risk relative to the potential return, then you are taking too much risk and should trade smaller size. If market conditions just aren't giving you enough good risk/reward situations, then you should be trading less frequently.
Van K.Tharp talks frequently about R multiples, which are essentially units of risk that you take. This is a brilliant way of expressing the concept, because it puts it purely in statistical terms. Every trade should have a positive statistical expectancy, whereby:
(% winners x expected gain) - (% losers x expected loss) > 0
The amount that you expect to gain should be a multiple (X times R) of the amount that you are risking (R). Then, you set R depending on your objectives.
See related: Are You Using the "Trader's Equation?"
Do you want to risk 1%, 2%, or 5% of your account on every single trade? That answer depends purely on your risk appetite. Nonetheless, this concept forces us to quantify the risk/return tradeoff and to link it to the amount of risk that we are taking on a specific trade.
It also gives us guidelines for better trading. If you expect a 3R winner, then don't take off the position at a 1.5R gain, even if that 1.5R gain is a nice chunk of change!
Thinking about risk/reward frees us from focusing solely on money and instead gets us thinking according to the right mindset for a winning trader.
As Mike Bellafiore says, focus on "One Good Trade." Your goal should be to make the next correct trading decision and execute it properly, rather than to hit a certain dollar figure, which could be out of line with market conditions.
Remember, good trading is about good decision making. Learn how to trade by evaluating risk/reward properly, learn how to take what the market will give you, and you stand a much greater chance of reaching any goal that you set.
Task: Practice reviewing and expressing trades in risk/reward terms, not in dollar terms.
Time: 10 minutes
2) Find a Like-Minded Trading Buddy
Elite performers typically develop in clusters, as Daniel Coyle documents in his book The Talent Code. One reason is the access to coaching; the other is because the elite performers make each other better. Trading is no different from any other performance activity. Working with other people multiplies our talents and helps us to overcome our weakness.
The goal of the interactions is to bounce ideas off each other, either about individual trades or about trading in general. You can talk about the ups and downs of the markets, about how to do things better, and compare different trading methodologies.
Just having to state your ideas more clearly can be a powerful tool for double-checking them. Sometimes, they'll just sound right and you'll want to increase the sizing. Other times, you will just stop yourself halfway though and realize that your idea is not going to work. Trading is not easy; trading in isolation is even harder.
You could structure a regular kind of interaction, like a constantly open chat room or meet-up at a regular frequency, or you could just leave it ad hoc, either when you want to share a good idea or get something off your chest. The important thing is to have those channels of communication open with a like-minded person-two heads are better than one.
In selecting a trading buddy, seek out someone who is doing broadly the same things as you, otherwise, you won't be speaking the same language. A long-term trend-following trader will have little in common with a daytrader, and there is unlikely to be much between the two. If you are pursuing similar styles, then you'll have a lot in common and be able to share a great deal.
Task: Find a trading buddy with whom you can share and learn about markets.
Time: 5 minutes to get in touch and get on the same page.
3) Implement a Journaling and Review System
Keeping a journal is one of the unsung heroes of good traders. While the contents vary from trader to trader, they use it to record things including their outstanding positions, performance, their thoughts on the market, and their own emotional state.
George Soros famously turned his diary into the book Alchemy of Finance. Just like talking to a trading buddy, the act of journaling helps us to work through our thoughts, thereby accelerating the velocity of ideas and their thoroughness. It only takes a few minutes a day to keep a journal, but added up over time, the benefits are immense.
See also: The Right Way to Journal Your Trades
Journaling is a natural lead-in to reviewing our past performance. Every so often, we can go back over our past trades and review how we are doing, looking at statistics like overall P&L, winning percentage, etc., but also looking at whether or not we had a rationale for a trade and if it made sense.
See also: Why P&L Doesn't Determine Success
The journal will have all of that raw information ready to go. Added up over time, we can get an idea of what kind of trades are working for us, what we can do better, and what we should stop doing immediately.
Moreover, if we are keeping good track our emotional states, we can get a good idea of how different emotional states correlate with our own trading results. Ultimately, we can use a journal and a review process to know ourselves and our trading better and to make the necessary improvements in both.
Task: Start keeping a journal. Either buy a notebook or open a new file in your computer.
Time: 5 minutes
4) Set a Routine Including Rest, Relaxation, and Recovery
We are human beings, not robots, so we need adequate rest and recovery time to perform at our best. Trading can be an extremely taxing activity, draining one's brainpower and sapping emotions. We need to sleep enough in order to recover and have the energy necessary to face the day.
Moreover, we need to make time to relax if we want to be working at our best. In his book The Now Habit, Neil Fiore provides a novel solution for people suffering from procrastination, burnout, and workaholism: the "unscheduled." In this, we schedule in advance lots of recreation and time with family and friends, and we fit our work around that.
Ideally, we would block out lots of time on the weekends and also some evening nights that are reserved for friends or family and also for something that we would enjoy, like a class or group activity.
The author recommends this approach because it is the opposite of what gets us in trouble. If we are always working or thinking about work, then we don't make time for play and can barely enjoy any recreation in the rare event that we take it.
For overall well being, we need to cultivate a holistic approach: get enough rest and make sure to enjoy yourself away from the screens.
Task: Evaluate your schedule and make time for rest and relaxation.
Time: 10 minutes to reconfigure your schedule
All together, these only take a few minutes to do, so what are you waiting for? Go implement them and let me know how your trading changes as a result.
By Bruce Bower of HowOfTrading.com