Previously I began a small series on developing a process loop and have been meaning to follow up on it for some time, but... Anyways, I thought I'd make the time to follow up with another post and share an example.
It is not hyperbole to claim that checklist save lives. When surgeon Atul Gawande decided to implement the use of a checklist in his practice the following occurred: "When his research team introduced one in eight hospitals in 2008, major surgery complications dropped 36% and deaths plunged 47%." Time Magazine
If something as simple as a checklist can have such an impact in critical care situations making use of one in trading it follows can be just as beneficial. The use of a simple checklist has become an invaluable tool to me because it helps keep me focused on the tasks at hand and lets me know when I'm straying too far from what I am trying to accomplish before, during, and after a trading session. My checklist is not simply a to-do list, it is also a to-don't list as well as information rich feedback to analyze later.
When developing a process loop consistency is crucial. More than simply a set of instructions, a process loop is a form of behavior modification. In fact I'd make the bold statement that a process loop may be one of the most important aspects of trading to develop due its potential to influence and instill better habits and develop a core of stability. By making this the focal point of every trading day one is developing a key habit –controlling what one can control. Since this premise is crucial to trading the best means of developing this attitude is through the discipline of a daily routine.
Trading is paradoxically simple yet utterly complex. Too often the road to trading success begins with the wrong goals –making money. This is of course the ultimate point to trading but in reality its jumping onto the autobahn in a Pinto when one should really be hiking up a scenic switchback at a measured pace with a focus on each step. It's my opinion that one of the biggest mistakes new traders make is approaching the markets without an approach –without a method. My initial foray in trading was wrought with the classic errors of searching for a means to make money without understanding what I was doing in the first place. I went through the gamut of technical analysis from MACD to RSI to moving average crossovers, technical patterns etc...
There are too many variables in trading to get lost in. If something isn't working switch the parameter and when that doesn't work switch the oscillator and when that doesn't work widen stops and when that doesn't work increase size. Over the past two years I've made these changes and alterations but one thing that I've kept consistent is my daily task list because it is within my means to do so. It's been the one rock in my trading that I've been able to build a solid foundation upon. Part of my process was to devote myself to understanding market breadth and write a daily report. This lead to insight in how markets actually work and not how I thought they did. By focusing upon mechanics and internals I began to deduce how stocks move and by how much and this information led me to make alterations to my trading plan, not what I wanted price action to do.
Over time my process morphed into my methodology which carried over into how I view markets and how I can create set-ups around it. Until recently I was still stuck in the muck and mire of a host of issues such as being able to take a signal, accept a stop, take a profit and avoid greed, letting profits turn into losses etc.... A process didn't make me immune to commit these sins of omission, but it definitely began to shine a light where my attention should be devoted and gave me the skill set to break these tasks down in a manner in which I could address them. What I began to learn is that the most important thing for me to do was not to address the whole, but rather work on the pieces and hone in on one task at a time. One of my biggest flaws of late and something that consistently showed up on my daily journal was trade management and by going through my journals and creating a composite this rang out loudly that it needed to be tended to. Without a daily process I would not have developed this body of work that allowed me to do so.
Returning to the value of a checklist, one thing I found noteworthy wasn't what I was checking off, but what I wasn't. A checklist isn't simple a rote instruction to follow, it's a feedback loop as well and what mine was telling me was that I needed to figure out if I wasn't completing a step because of disinterest, distraction, or it was no longer useful and that step could be devoted to something else. Most importantly it's a clue to me that I may need to take a step back from trading because if I'm not following through on an important task then I'm becoming lazy and this in turn can led to greater problems such as reverting back into a bad habit that will prove harmful to my account. Additionally what it tells me is that I need to refocus on mental state management, something that I've been keenly aware of as a weakness and have spent a considerable amount of time studying and improving.
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| My Process Loop |
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