Creating More Consistency in Your Trading - Part 1
05/26/2014 6:00 am EST
We all have things that we feel quite strongly about, for completely irrational reasons. Me? I can’t stand rollercoasters. While some people get a kick out of the adrenaline rush, I prefer steady and smooth riding. One thing’s for sure—I don’t want the huge swings and volatile ups and downs.
With the markets, I am the same. I can’t stand huge swings. I like steady and smooth. Consistency is the name of the game for me. No rollercoaster, no adrenaline. Just disciplined, measured and smooth.
Traders of all skill level always ask—“How do I get more consistent?” Sometimes they want to feel that they’re routinely getting into better setups and out of trades gone wrong. Or they want to improve their overall results, so that their equity curve is a steady, smooth march upward, with fewer drawdowns along the way. Or they have trouble with the preparation side of things and want to be steadier and more constant in getting ready for the markets.
There are two key aspects to becoming more consistent: the first is your work, habits and preparation and the second is your results. Any level of success in the market requires effort, work and a basic level of emotional self-mastery. Consistent success is the product of the right amount of and type of preparation, work and approach to trading. The quality of your output—your P&L—is only as good as the quality and quantity of your inputs. We are now going to look at the right steps to take to improve your inputs—and thereby your results.
The key for trading is to make sure that your effort is consistent. Obviously, if you want to be a full-time portfolio manager or trader, then you can’t work on it two hours per week. You need to be putting in the hours and effort in order to make it happen. Of course, in order to do that, you need to make sure that you have the right amount of time to give. If you have too many commitments or activities, then you need to pare them down so as to give you the time to devote to proper preparation. You are going to be active in the market alongside people who are devoting 60+ hours/week to studying the markets, researching investments and preparing, so you want to have at least the minimum preparation necessary to hold your own.
One thing related to this is making sure that the timing of your effort is consistent. The markets are open almost every day, so you want to be putting in a certain minimum amount of time every day. If you want to be successful, you can’t put in a couple days of work and then do nothing for a week; you need to be putting in the necessary amount of time every day and smoothing out your efforts.
The best way to make sure that you are putting in the necessary effort and preparation is to create a routine—to define what kind of research, preparation, and review you will be doing everyday and every week. That way, instead of your market activities being scattered and unfocused, you can determine the minimum that you have to do everyday. You are turning your preparation and effort into a habit.
Think of all of the things that you do every day, like brushing your teeth or exercising. You are able to do those because they have become habits. You do almost automatically, without thinking about them. The best way to make your preparation as consistent as possible is to turn it into another habitual activity, something that you undertake almost automatically.
In his book The Slight Edge, Jeff Olson identifies the key to sustained success in any sphere as simple actions undertaken daily. In his research, he found that small, daily efforts were much more effective in producing long-term progress than concentrated but less frequent bursts of activity. By keeping our goal constantly in front of us, we stay focused on it. The discipline of working at it every day, even if only for a couple minutes in a seemingly insignificant way, ensures that we will also be moving forward. The edge that we get from daily action may seem slight at first but over time it produces massive compounded returns. We should think of our preparation as a “slight edge” behavior—by being consistent and disciplined with it, we are undertaking an activity that will produce a massive cumulative gain for us.
NEXT PAGE: How Do I Create Helpful Habits?|pagebreak|
Of course, there are some activities that you do automatically that are not helpful. Think of the hours that you can lose checking social networks or idly chatting with friends. Think of the habitual arguments that you have with your spouse. All of these are also automatic behaviors, and not ones that necessarily help you. In the case of trading, you want your habits to be ones that help you advance in the direction of your goals. Thus, you need to create habits and routines that assist you in your trading. Much like you brush your teeth automatically every day (at least, I hope you do!) and thereby improve your health, you will want to create similar automatic habits.
In addition, you need to create or reinforce habits outside of trading that can reinforce your success. Some of the most obvious ones support a healthy lifestyle—getting enough good sleep; eating right; exercising; and making sure to relax thoroughly from time to time, in order to de-stress and recuperate. These are also habits that will help you become a more successful trader, even if they aren’t directly related to the markets. Never forget—a healthy mind needs a healthy body.
How Do I Create Helpful Habits?
In the ground-breaking book The Power of Habit, the author Charles Duhigg studies how we create and maintain habits. The first step is realizing that habits are mostly unconscious, automatic behaviors that we do without thinking, much like getting dressed or taking the dog out everyday. Because we have done them so many times, we don’t have to think or make difficult decisions—instead, we can just go on autopilot. One of the reasons why we create habits is because they don’t tax our willpower, which is a limited resource. This frees up our brain’s higher functions for making other decisions that are new or require more cognitive effort. The key to creating habits is setting up these autopilot routines.
According to Duhigg, every habit has three steps:
- Cue: The circumstances or event that trigger a certain action
- Routine: The routine action, set of actions or responses that you take
- Reward: This is the reason that we do something- the reward, prize or alleviation of a problem.
The book digs down to describe certain habitual actions, like brushing our teeth: as we’re going to bed, we add toothpaste to our toothbrush; we brush our teeth; then we get the tingling, minty, clean sensation in our mouth. Bingo. We are hooked and want to brush our teeth every day, forever. Our trading habits should be no different. We need to create a cue; a set of routine actions; and a reward.
How do we best do that? The first step is to think of what cues we want to use. What will integrate best with our circumstances? If you are a hedge fund manager who reports to investors monthly, then you probably want to check the markets as soon as you wake up; if you are a longer-term investor just watching your retirement account, then maybe it can wait until you get home from work. Nonetheless, you need a cue to mark the start of your preparation. Some potential cues for starting your preparation could include the following:
- When you get up in the morning
- When you get to the office—especially if you are a professional, full-time
- When you get home in the evening
- When you finish dinner
- When you hit a certain hour of the day, e.g. 10:00 am or 6:00 pm
These are cues for preparation that happens every day. You can add in additional cues, for instance doing a big burst of additional research every Saturday morning.
You can make the cue easier for yourself by getting your preparation materials in advance. Just like someone who wants to go running leaves their gym shoes out the night before, you could leave your handwritten journal out on your desk, making it easy to get started the next morning.
Once there’s a cue, then you start your preparation routine. The level of preparation obviously depends on your trading style and circumstances. Intraday traders will need to undertake intensive and thorough preparation every day, monitoring a number of things; long-term investors may restrict themselves to ten minutes of looking at prices, major news items and corporate actions; the bulk of their activity would be absorbed by setting and then executing their research program for the day. No matter what, the best way to prepare is to have a pre-defined preparation routine that is either completely or nearly completely pre-determined. You want to have a list of tasks to complete.
NEXT PAGE: A Sample List of Tasks|pagebreak|
A sample list may look like this for a hedge fund manager who is focused on stocks.
- Get into the office and sit down at computer
- Check quotes for the Asian and European markets overnight
- Spend ten minutes going through the major headlines and news stories in the world
- Spend 30 minutes going through the major news stories for stocks that he is focused on, either existing positions or potential positions
- Go through charts for 20 minutes for major indices, blue-chips, and portfolio companies, making notes on market observations or key levels
- Write down a list of tasks that need doing for the day: news items to learn more about; which stocks to research further; actions that need to be taken in the portfolio
Altogether, this preparation routine may take up to an hour at the start of the day, but it is what the Power of Habit calls a keystone habit—as in, it is the one that shores up almost everything else around you. If you are doing your preparation properly and habitually, then you will make better-informed decisions about what to buy and sell; you will feel calmer in spite of market movements because you will be better prepared for anything that may come; and you will have more structure and be more productive during your workday, because you planned out your research schedule in advance. Consistent, habitual preparation is the keystone habit that will lead you to greater trading success—its effect on your results is multiplicative.
This kind of preparation is a good first step, ensuring that you are putting in the right kind of effort. But what else can you do to become more consistent? Here are a few other ideas:
Create an accountability system for yourself. This is a way of tracking for yourself that you are doing your preparation routinely. It should be quite easy to track. As an example, Jerry Seinfeld famously kept a big wall calendar for himself. Any day that he wrote jokes or practiced, he would put a big X through that day. After a few days of X’s, he would have a chain—and his stated goal was “not to break the chain.” You could do a simple exercise like this to keep track of when you are doing the necessary preparation. It could be a big wall calendar; in Mircosoft Outlook; or in a simple log file in Microsoft Excel. Whatever it takes, get started.
Create outside accountability. Talking with someone else is a powerful accountability mechanism. Many groups have been able to instill and strengthen habits through groups and accountability to that group. In The Power of Habit, they cite the example of Alcoholics Anonymous—where members have to follow a rigid 12-step program and constantly report on their progress to other members. Similarly, many successful people report that they have a mastermind group—a small coterie of like-minded business people with whom they share their plans and activities and who keep each other on track.
In order for outside accountability to work and to help boost your consistency, it has to be regular. Your accountability system won’t work if you only meet with your partner once every six months. Rather, you should meet or communicate regularly. Ideally, it would be weekly. “Facing the music” weekly will have a dramatic and positive impact on your consistency.
Track the quality of your preparation. You could keep a journal where you review the consistency of your habits and also rate the quality of your preparation. For instance, if you are really tired due to illness or if you got in late because of terrible traffic, then you would rate your preparation as a 5 out of 10; if you were all ready to go and really plunged into it, then it would hopefully be closer to an or 9. You have already created a system to track the frequency of your preparation; your goal is to create a monitoring system for quality to make sure that you are consistently giving your best effort.