Creating More Consistency in Your Trading - Part 2

05/27/2014 6:00 am EST


Consistent success is the product of the right amount of and type of preparation, work and approach to trading, says. Bruce Bower of SMB Training Blog and

When traders say that they want to be more consistent, they usually mean that they want their results to be more consistent. To wit, they want to be profitable more often with fewer drawdowns. They want to experience a smooth, steadily rising equity curve, not a rollercoaster P&L. They want to feel like they are making consistent profits and progress, rather than spinning their wheels. One of the best ways to do that is through making your efforts consistent—because the quality of your output will vary with your input, then you want to make sure that you are taking all of the necessary steps.

But if you have the goal of making your results more consistent, then there are a few things you can do. The first is to define what consistent or more consistent means to you—because this is dependent on your style. Consistency looks different for different styles. If you are a day trader, then your results should be relatively consistent from month to month. While you may have great days or terrible days, you shouldn’t see tremendous deviation over longer periods of time. Contrast that with a macro-focused portfolio manager who is putting expressing economic views with a time horizon of a year. His results could fluctuate tremendously from month to month, and even from year to year.

Over the course of several years, he should end up doing very well, but his goal is to smooth out the monthly swings. One reason could be that the emotional swings that accompany the P&L swings are too much to handle, so it removes a lot of psychological pressure. Another could be for risk management purposes—he wants to be more consistent so that the inevitable drawdowns don’t cause catastrophic damage. Whatever the reason, he can become more consistent in his results—but because of his style, his returns will never look as consistent as the day trader’s. Thus, when you are looking for consistency in your results, you have to keep your own style in mind. Set some numerical targets for the following:

Profitability on the appropriate time frame e.g. dollars per week for intraday traders; percent per year for long-term investors. You want to have an idea of what you are shooting for.

Drawdowns. What is the maximum drawdown that you would permit yourself before stopping out of all of your positions and just moving to cash? Again, this needs to be in keeping with your style. A long-term buy and hold investor in stocks has to be able to withstand a 2% swing in his account; he would probably only get nervous about 25% drawdowns.

Frequency of taking positions and trading. You want to make sure that you are putting on positions as frequently or infrequently as you would expect. If you think that you are a long-term investor and that your strengths lie in fundamental analysis and proceed to turn over your portfolio in one month, then there is a problem!

NEXT PAGE: Understanding Risk


Once you have these numerical targets in mind, then you know what consistent results will look like. You know what signposts to look for on your trading journey, as you move towards the kind of results you want. As the quality and consistency of your inputs improves—i.e. your preparation—then you should see a boost to your returns. By setting targets for your results, monitoring your progress and making various tweaks along the way, you can improve.

But perhaps the most important part for getting consistent results is understanding risk. The bottom line is: if you want to make your results, you need to take less risk, especially at first. There are a few reasons to do this:

Big drawdowns are the biggest threat to a consistent, long-term track record. Most people think that you need to take a lot of risk. To accumulate a large amount of capital, you don’t need to make 40% per year and always try to hit home runs. That would actually put you at risk for significant drawdowns which would take forever to come back from. If you want to get rich without jeopardizing your financial future, then 12-15% returns annualized with small drawdowns is a perfectly valid strategy. If you avoid big drawdowns yet take a little bit of risk, then you can generate positive returns every year. This is the model of steady, consistent returns.

If you take too much risk, then your emotions get involved. If you take a lot of risk, then your P&L swings will be bigger—and this will inevitably involve your emotions. Your proclivity to greed or fear will skyrocket—because your overall account is fluctuating dramatically with every tick. If the pain gets too big on a losing position, then you just cut it—even if it’s not the right decision to make. Similarly, you may cling to a winner because it’s made you a lot of money, even if it’s not the right position to hold. Either way, your emotions are beginning to cloud your judgment, which is lethal for most trading decisions. The quickest way to avoid this emotional rollercoaster is reduce your position size by a few notches. That way, you can stay focused on your decision-making process rather than on the monetary sums involved. You can become detached from the short-term swings in P&L and stay unemotional. This is the ideal state from which to be making risk/reward decisions.

When you take less risk, your P&L will show smaller, less dramatic fluctuations. You aren’t going to earn 100% in a year—your P&L will probably emulate the fairy tale of “slow and steady winning the race”. But slow and steady is the very definition of consistent! By dialing down the risk and focusing on executing your bread-and-butter trading strategy, you will produce the smoother, more consistent results that you are looking for.

Bottom line: Cut your risk down, focus on trading better and you will get the results that you are looking for.

In his Market Wizards interview, Bruce Kovner gave his infamous advice on how to be a better trader: “Undertrade, undertrade, undertrade.” I love this quote so much that I have it taped to my computer monitor. I interpret it to mean dialing down the frequency of your trading and the bet size. Instead of trying to get rich quick, just relax, trade smaller size and focus on making better risk/reward decisions. You will get the consistency that you seek.

Bruce Bower, Contributor, SMB Training Blog, and Blogger,

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