Same Shit, Different Day

Process Takes Precedence Over Opinions.  

My opinion coming into yesterday was that the market was terrible on my time frame.  The market was in concordance.  Not one anticipation setup triggered.  Coming into today I thought the market was terrible on my time frame.  The market disagreed.  Nearly every anticipation setup triggered within the first 30 minutes of the session. 

Doing the same shit everyday and staying engaged leads to insights when it is a different day.  While I am still of the opinion that the market is not exactly stellar on my time frame due to a lack of breadth trends, I'm not going to argue when setups trigger en masse.

How I Trade Anticipation Set Ups

Sunday through Thursday I run scans across my stock lists to find 6 stocks that I expect to have breakouts the following morning.  My objective is to enter before they trigger a signal on my breakout scans.  This process also doubles as a market awareness exercise.  If I don't find many, the process provides awareness of market behavior on my time frame.  The same if there are are more candidates than manageable.

When there are candidates found I set up the parameters of the trade in a spreadsheet.

Trade Parameters

The spreadsheet calculates my stop, targets, and distance from close to my entry which acts as a filter.  As I am expecting these to breakout, I am more stringent on the distance as there is no point entering a stock that would otherwise show up as a breakout.  With stocks between 10 to 25 I generally filter around 2%, under 10 I'll allow a little more percentage wise, and over 25 I'll start to look at the distance in dollar values. 

The spreadsheet also notes the high of the day which in the current example is at the close of Friday.  So I know 2 triggered.  When they trigger, I follow the price action over the next ten days and note whether or not price reached 2-1 or 20%.  This process also gives me information about the market on my time frame.  It informs if anticipation setups are working well in the current environment.  It informs me of the max profit potential of the trades over a ten day horizon, and whether or not my targets are being hit during these moves.  In general I look at taking half off at 2-1, trail a stop, and aim for the 20% threshold.  But, if 2-1 is all the market is giving I'll look to take more off or exit completely.  If 20% targets are being hit with frequency and the market is hot, then I'll look to push the edge to capture more.

With the parameters set, it's time to set alerts.  Of the list above I settled on 5.

Trade Alerts

Alerts also double as a market awareness exercise.  While I am willing to allow an hour from open to take these trades, ideally an anticipation trade should trigger an alert within the first 30 minutes, preferably within the first 15.  If all of them trigger it informs me about market direction for that day.  None of them triggering tells a story as well.  After the opening hour stocks that didn't trigger anticipation will be followed for triggering a break out later in the day.  This is a FIFO process and I predetermine how many I will take based upon current held positions.

After one triggers and I enter the trade, I'll set my stop and target alerts.  Within the first 30 minutes this is the price action I expect.

Expected Price Action

At no point after entry is that price point challenged.  This indicates that I am on the correct side of the order flow for my time frame. 

By the close the daily bar confirms the trade and is therefor held.

CAE Daily

The second trade I took that morning was IOVA which triggered and showed price confirming that I was on the correct side of the order flow for my time frame.

IOVA: Expected Price Action After Entry

However, by the end of the trading session price action on the daily time frame did not confirm with a breakout and closed below entry which is an exit signal for a small loss.

Price Fails to Confirm Daily Breakout

Once a trade is taken the management is as follows: 

• EOD close > Entry or jettison the trade
• Day 2 Close > Day 1 entry or jettison the trade
• Day 3 premarket move stop to BE
• Day 3 if no profit targets are hit then take half off EOD and move stop to LOD
• Trail stop to each successive higher low, take off remainder at 2-1 or stop hit
• If 2-1 target hit, continue to ratchet LOD stock and aim for 20%

PIck 6 Quinella and Market Direction

Each trading night I look for 6 anticipation set ups for the next trading session.  Doing this for a lengthy period of time has led to a few revelations that assist in managing market risk and exposure.  First, if there aren't a plethora of setups and I'm struggling to just find a few A-grade setups then the market on my time frame is highly probable to be incongruent with my trading style.  Either too many stocks are extended to the upside or they are pulling back.  Second, if setups are found and they don't trigger, this is yet another sign the market and my time frame are in disharmony.

Slim Pickins

Lately the market has been slim pickings and stocks that I have been interested in are not triggering.  Not a single one the past two days has made a high greater than my anticipation entry.  Under better circumstances these should be firing off early in the trading session.  When the market is conducive, such as last week, the landscape looks quite a bit different.

Robusto

 

Improving Execution and Consistency Through Habits

As a tournament chess player there are a number of openings I know up to a depth of 20 moves.  When playing blitz I can rattle these by route in seconds with little to no thought.  I have a level of competence that allows me to do this with confidence consistently and repeatedly.  In trading things aren't so black and white, but the ability to execute consistently without hesitation remains true.  In order to improve my execution I've looked at a number of different techniques, but one I've found most useful is filtering my trading plan through a habit.

Recently, while the market has been in a corrective mode, I've returned to a trading idea that I couldn't make work but now believe I can.  As with any setup I had to clearly define the parameters of vehicle selection, entry, stop, and exit.  The first thing I do is write them down as clearly and concisely as possible.

Setup

Once I have my setup defined I turn to this diagram to assist me in filtering.

French Defense

This is a position I know very well and have played thousands of games from.  I can execute this blindfolded.  In order to improve execution and consistency in my trading I've experimented with transferring this habitual knowledge into habitual trading.  To do so I structure my trading plan as chess moves.

Trading Moves

The key for me is to chunk a couple bullet point concepts within each move as opposed to drawing out each step.  If bullet points get up to 5 I'll place the next steps under a different move.  Crucially I look to avoid going too deep into an opening where there are 5 to 6 moves with 5 bullet points each.  Reaching 25 to 30 steps in the process informs me to prune back the tree.

The steps exemplified:

Find High AH Volume

Catalyst

URBN Trade

Trade the Plan

Over the weekend there were a number of setups that I found and set alerts for.  Usually within the first 30 minutes of the market open I have a decent gauge of how the day is going to go for me.  If they trigger in bunches I will frequently be on the correct side of the order flow for my time frame.  If there are few to none that trigger I know the probabilities are not on my side.

Today there were a couple that triggered then reversed hard.  Additionally stocks I was stalking had break downs from patterns I view as constructive.  

ELF Breakdown

GH Breakdown

When markets move in my favor I've noted that sloppiness can creep in and the daily process gets neglected.  When everything is working, what is there to plan?  Current market structure is a healthy reminder that under every and all circumstances having a clearly defined plan of action mitigates damage, but just as importantly improves consistency during upswings.

Trading Plan

#STUDY Data Driven Trade Idea Part 2

In a previous post I discussed uncorking a trading idea that I shelved for an extended period of time in order to see if my present self could trade what my previous self could not.  In order to test my beliefs I executed the original concept with one tweak over a series of trades and collected pertinent data points to make further adjustments and refinements as necessary.

What I found out from this experiment is that I could execute the system with consistency.  That the system as implemented resulted in neither gains nor losses.  Making a tweak to the parameters of the system turned it from break even to profitable and that to exploit my edge this is where I would address the shortcomings over the next sample size.  In addition I noted that there were a few data points that would help future iterations so I adjusted my spreadsheet to document them.

Unlike the first series I failed slightly in the consistency department.  Immediately I botched the first few trades as I was still adjusting to the timing and the mechanics.  I ended up choking off trades too quickly resulting in missing a significant portion of the move on two of the most profitable positions within my sample size.  Additionally, I was slow to react on a number of signals and was forced to set time aside to investigate my trading software to improve efficiency of execution.  With the initial hiccups out of the way the results are in.

First Trail Run

Second Trail Run

With a simple adjustment of adding a trailing stop instead of closing out the position in the last half hour of the trading day a break even system became a profitable system.  Knowing that a simple adjustment to the execution of the first sample size would have made it profitable and then executing that over another sample with consistent results, win/loss, and stops gives me greater confidence in continuing with this.  

Over the next trial run the refinement to the system will be focused on a proper position size algorithm for each trade.  As I'm only willing to tweak one parameter per run I'll look to first increase size while maintaining the current stop.  Currently I am using a fixed position size and stop loss regardless of price and to improve profitability trading a $4 stock the same as a $40 stock is inefficient and wasted opportunity cost.  

#STUDY: Data Driven Trade Idea

During the market doldrums I uncorked an idea that I had a while back but was unable to trade successfully.  I had shown myself that it was a profitable system but I couldn’t internalize it and become a profitable trader using it.  I still firmly believed there was an edge and decided to investigate once again.  

I began with questioning why I was having difficulties trading this system to begin with.  Upon inspection I realized that I was overly optimistic as to how many stocks I could track.  My first step in the process was to reduce the numbers of stocks observed to a more manageable number through stricter filters and focus on just four.

The next step was to address where I was having issues with trade management.  I realized that I was using too much size for my experience level and opted to trade small over a sample of approximately twenty trades and document a number of price action metrics that occurred during the duration of the trade.

Trade Sample.

Trade Sample

From this I had the following results.

Metrics

Of note is that after 18 trades, this system as implemented made 0 dollars.  Literally 0 dollars.  I was stopped out for maximum loss on 4 of these trades.  50% of the sample hit the low of the day.

The question I wanted to answer is what adjustments could be made for this system to be profitable.  As I’m already trading small, I dismissed reducing risk through positions size as an option.  Only 4 of 18 were stopped out.  With only 20% of the sample size being stopped out I dismissed moving this up — for now — particularly since moving the stop up to the low of day would increase my being stopped out 100% due to 9 of 18 clipping the low of the day. 

Given that I was comfortable with the current trade risk and stop level I looked at selling into strength.  While top ticking is a foolish pursuit, since this system is intraday it’s the only metric I have.  Using the top tick of the day I determined the price differential from my entry.  This averaged out to $1.52.  I adjusted prices from $1.52 downward to a level I concluded didn’t choke off the trade potential too soon yet also captured profit.  Calculating this I accepted that a $1 trailing stop would capture an acceptable profit to make this system viable.

From Marginal to Profitable

With this information I will pursue another sample of trades, collect further data, and use these metrics to refine this system further, making one adjustment at a time.

#STUDY: Improve Market Timing and Risk Management

When the underlying market structure is no longer in agreement with periods of peak effectiveness and profitability, my focus turns to assessing information that suggest a realignment between how I trade and how stocks are behaving.  In order to quantify this I defer to the facts of my trading results, the expansion or contraction of my trading universe, the effectiveness of my signals, and the quantity of stocks that match gains over my holding period.

My process is as follows:

Breadth of my trading universe.  How many stocks are in my trading universe and is it contracting or expanding?

How are stocks behaving over my time frame?  How many meet my average gain over this time frame?

How are my signals behaving over my time frame?  

My trading universe is dynamic and based upon a simple calculation of momentum over a 3 and 6 month time frame.  Being dynamic this will contract or expand depending upon the underlying market structure.  There are currently 5700 stocks and ADRs in Telechart and of those only 357 meet my 3 month requirements and 161 my 6 month requirements.  This is clearly a period of contraction and indicates that the market I trade on my time frame is not conducive.  What would indicate to me that there is an improvement on my time frame would be seeing this universe expand to 10-20% or more. 

Universe

How many new highs are there over a 3 and 6 month period?  Currently they are inverted.  1 month highs have moved above 1 month lows which is positive for my holding period of 5 to 10 days, however stocks that meet my momentum requirements are currently inverted with new lows eclipsing new highs. 

New Highs-Lows

In addition I have a scan based upon weekly price action.  One of the benefits of dynamic scans that have consistent properties is they expand or contract based upon the underlying market structure.  This particular scan is based upon a decrease in price volatility.  For this week there are only 346 of 5700 stocks that meet the requirements which is on the lower side.  Clearly there has been an increase in volatility which is reflected in the return numbers of this scan.  Periods where I have traded better have lower volatility, so as volatility decreases this scan will reflect that and indicate the structure of the market is realigning to my strengths.

Weekly Watchlist

Weekly Watchlist

Moving from trading universe to trading signals, I asses how many stocks that met my entry trigger have had a follow through on day two and are higher by my time stop —day 5.  As the numbers currently show, by day 5 only 48 of the stocks that flashed a signal ended higher than signal day.  This indicates that even with a decent bounce in the general market as represented by the major indices, price from my signals on my time horizon is not well reflected.

Price/Time Horizon

My weekly signal gives a wealth of information.  From this universe I assess whether or not there are there stocks that meet my technical requirements to trade.  How many there are and how they behave over my time horizon gives me information about current structure.   Are they triggering?  Are they reaching my exit signals or stopping out due to a loss or time stop?  How are they behaving over the entire ten days?  A time comparison of these metrics is a useful template for when the market is realigning or diverging.

Period of Alignment

Period of Divergence

During times when the underlying market structure is congruent there will be a number of candidates, they will trigger, and expectations will generally be met over time as targets are hit.  When there is divergence the candidates decline and fail to trigger, or trigger and targets aren't hit but stops are.

Another piece of information from my trading results is what is my typical gain and how many stocks have met that over my holding period.  If on average my exit is in the range of a 12% gain and my average dollar is $2, then knowing how many stocks are up 12% or $2 over my time frame is useful information that marries my expectation with what the market is offering.  Conversely, knowing how many stocks retreat the value of expectation highlights periods where I may be out of alignment with market structure.

Leadership

Through using one’s trading stats along with periods of peak profits as a template, the current market backdrop can be more clearly assessed.  Risk reduces when the market structure aligns with one's trading metrics.  Market analysis through the lens of one's metrics gives quantifiable information to filter the current structure and behavior that can be repeated.  This is an inherent part of risk management, trading aggressively during conducive periods while tampering down during divergences, and a repeatable process helps ensure consistency. 

Additionally, filtering the market through metrics assist in timing during corrective periods.  Instead of falling into the trap of guessing a top, allow the contraction of one's trading universe and a divergence of expectations to be the awareness that structure may be changing.  Instead of falling into the trap of picking the bottom, allow metrics to be the guide when stocks realign with expectations, one's universe increases, and behavior over one's time horizon improves.

Hunting for 100%

For some reason unbeknownst to me, back testing is considered a viable means of study, but forward testing is dismayed as paper trading and therefor inconsequential if not outright detrimental.  I've come to the conclusion that these are not mutually exclusive strategies for trading improvement if you identify their strengths and weaknesses and how the information gleamed is personally applicable.

Highly successful traders tout the idea of studying past winners.  This is a common them past down from one generation to the next like a family yarn, but one thing I've observed is that there is a lot of effort placed in the fantasy of focusing on the unicorns.  In addition, there is a lack of attention paid to how these traders of yore modified their techniques over time accounting for varying market conditions.  While the winners of the Dot Com era may have net 100% gains over night, the study of them from a swing trading perspective to eke out a 10% gain over a week or two under current market conditions is somewhat misplaced.

While there is nothing wrong with studying past winners, and these studies can lead to future benefits, the issues I've noted that often arise is attributing incorrectly one's time frame, risk tolerance, capital allocation --among other biases-- to the chart in question.  In realizing the star gazer within me I've made focused effort in moving my market studies to real time so that moving forward I can more accurately access the past I've experienced.

For 2017 I've given myself a challenge of isolating stocks making 100% moves in real time.  The goal is not to capture these 100% moves, but one or two slices of 20% gains from them.  I want to isolate what makes these moves tick as they're unfolding to reinforce what the current market conditions favor as well as have data to back up whether or not I was able to capture these moves.  It's one thing to believe you would have been in a rocket stock of the past, but another to find your future self looking successfully backwards knowing you were.  

Through forward testing both in theory and in practice one of my aims is to dispel the charms of past patterns and the delusion of being in 1000% moves in stocks and focus these dreamer periods into actual effort of churning out 20% gains on a more frequent basis.  If I'm consistently aware of stocks that are on their way to making such moves in real time and not capturing a slice then there is a completely different issue to address.  Holding myself accountable for missing these is a priority in 2017.

Hunting 100% Movers in Real Time

Test Driven Trading

In software development there is a technique called Test Driven Development which is a process of taking requirements of a project and breaking these requirements down into cases which will be accepted if proven.  These test are often derived from user stories and are typically broken down into unit test which test expectation of a function or method, as well as integration test which test a feature from end to end.

There are two common ways of testing.  One is to write the test the code is expected to pass first, and the other is to write the code then test against it.  What I'm interested in exploring from these concepts is how traders can incorporate this thinking to test their plan, debug inefficiencies, as well as introduce new concepts without breaking the current flow of execution.  How can traders approach their trading from the perspective of a software developer?

The process of an integration test can be used to develop a process from how to approach studying to setting alerts, entry, stop placement, and exit.  Once we have applied the theory of integration test we can apply the concepts of unit test for handling the minutia of a trading plan whether it be entry, placing a stop, or exiting a position.  For this I'm going to look at one specific syntactic approach: Given, When, Then.

Given, When, Then is a syntax that when coupled with Feature and Scenario complete an approach called Behavior Driven Development.  In this approach a small chunk of the trading plan such as an exit can be broken down such as:

Feature: I have an open position
Scenario: Exiting the position
Given: A trade hits my target
When: I take half off
Then: I will move my stop to break even on remainder.

Feature: Half Sized Open Position
Scenario: Exiting the position
Given: A trade hit my target and I moved my stop to break even
When: Price hits 20% from entry
Then: I will exit the remainder position

Now, when reviewing previous trades or searching through previous winners we have a focused set of criteria to pay attention to.  We can better understand how our previous trades would have worked under these guidelines.  Additionally since these test are being applied to the minimal amount of execution on our part, complexity setting in can be more easily identified by noticing when the test are getting too verbose and have too many steps or moving parts.  And, while these test may pass on past data, a complete integration test of this on one's actual trading plan may not work out as expected.

Simply because something worked in hindsight doesn't mean I will be able to execute.  As such, whenever I make a modification to a critical part of my trading plan such as an exit, I drop down in size and take twenty trades.  I don't assume I am going to act in accordance and can not presume potential frustration should this new exit technique not work under current market conditions or be psychologically comfortable to me.  By dropping down in size I reduce the risk to capital and some of the stressors associated with a position size I may not be comfortable.  Being undersized when using these parameters increases my chance of success in abiding by the rules and achieving a large enough sample size to be meaningfully analyzed.

Additionally, thinking in terms of test prevents straying from one's trading plan when making adjustments.  Often when something isn't working traders will jump ship and adopt a different trading style instead of maintaining a consistent philosophy and making necessary adjustments. Through testing each function of the trading plan it become easier to isolate and identify where potential problems are creeping in and handle them accordingly.

Organized Trader- Using Google Spreadsheets and Gmail

Over the past year I've taken some time away from the markets to place more energy and focus on other goals and passions.  As I entertained these endeavors I mostly ignored the market.  When I did take a glance I started to make analogies.  I continually asked if there was a trading lesson to be learned or if what I was studying could relate or enlighten me in some way about trading and how I traded.

When I returned to my market studies the most important things I realized was that I am much better off ignoring the market as much as possible.   I didn't want to obsess over finding trading candidates on a daily basis.  I didn't want to log into my platform every half hour to an hour to see what may have triggered or how much a trade moved in my favor or against.  Another important realization was that my holding period was too short.  I was never really giving my trades enough time to work out and choked off positions much too early.  When I resumed actual trading I made a 20 trade commitment to a plan that addressed both of these realizations.

One of the first things I did was look at this as a problem solving exercise.   I started to think about what tools I could use to achieve my objectives and then a process loop on implementation.  The first thing I settled upon was avoiding daily chart analysis in preference of weekend analysis.  I would run my scans searching for candidates and then whittle this down further to a hand full of higher conviction anticipation trades along with a secondary list of setups for break outs.  Once I have these candidates I map out their entry/stop/size/targets using Google Spreadsheets.

Google Trade Sheet

Once I have my candidates I then set alerts on my platform to be emailed .   I have a Gmail account set up specifically for trade alerts that I have synced to my phone.  These emails set out the parameters of the trade so I can either fire off one from my phone if I'm mobile or log into my platform.

Email Alerts

Having done this for the past few months I've gleamed some insight, truth, and wisdom, along with a dose of reality and humbleness.

The most important awareness this process cemented with me is trading isn't Pokemon and I'm not going to catch them all.  This may well seem obvious but looks can be deceiving.  What I now had in front of me is concrete evidence in real time of triggered trades.  With this data I could now ask myself questions at the end of the week.  Was I in a trade from my overall watch list that performed the best?  If not then why?  Did I take all of the anticipation trades that triggered?  Again, if not then why?  The biggest benefit of this was demystifying the left of the chart.

Past studies of stocks can give the belief that they are catchable and that we as traders could have made the best of them and now will do so moving forward.  While it's eye catching to see stocks move up 100% or more over a short period of time it's important to take caution of all that glitters.  While these are absolutely worth investigating and filtering through one's methodology, they can also leave a false impression.  By having time stamped data I now know which one's I entered and can know in real time if I missed a big mover because my capital was already tied up, or if I may not have been trading that week, or price may have run too fast too soon by the time I could hit send.

Come the end of the week I will walk through my overall watch list and take note of what stocks moved the most and what refinements I can make with this knowledge.  I also go through those that triggered but failed and those that failed completely to maintain a balanced perspective as well as pertinent information about the overall health of the market.

Another awareness I came to was expectation.  Two key pieces of information I keep track of are the number of stocks that hit 2-1 or 20% over my holding time frame.  This assist me in managing my exit plan.  This could be the difference between taking off my full position at 2-1, taking off half and riding the rest over my time stop or 20%, or gunning for a full 20%.

Are my stocks triggering?  Monday morning 6:35 PST with four alerts pinging tells me a completely different story then Wednesday afternoon an hour before market close with one finally triggering.  I may consider that worthy of a pass.  It also informs me whether I might be willing to go full margin by the end of the day or take some break outs before the close.

This year my commitment to trading will be putting in the leg work on the weekends, ignoring news and noise, refining and filtering the process, and removing myself from the market as much as possible during the week.

Simplification

My niece texted me yesterday that, “The market is looking good!! :)” This was the first time it didn't take any prodding or a helpful reminder from me. Over the holidays I helped her with an upcoming stock market class project she would have for her Spring semester. Before visiting I shipped her a copy of, How to Make Money in Stocks, and instructed her to thoroughly study only one chapter before I came down, “M = Market Direction: How You Can Determine It.”  If there was anything I wanted her to take away from our conversations it was a daily habit of knowing what the market is currently doing.

One of my main focal points was to streamline as much as possible a process that she could review the daily action in a few minutes. I hadn't realized how ridiculously busy and time committed she was and in addition I wasn't completely sure about how much energy she was willing to put into this right now so I stressed that she had a lifetime to study and hone her craft in the market, but if she could just find a few minutes a day to develop a system of analyzing the current market state it would compound and pay dividends later. If she committed to a simple daily process her knowledge would subtly increase and accumulate. So my first task was to make things as steam lined as possible.

To determine market direction I gave her a handful of simple tasks: Is price higher or lower than the 50MA of the SP and Nasdaq, is this MA rising, flat, or declining, and tally a running count of the number of stocks that have hit new All-Time-Highs. From this simple matrix I gave her a few suggestions on what to look for and some tips to gauge if the market is healthy for trading or not and left it up to her own observation.

Additionally this simplified her trading universe down to All-Time-Highs which would be a manageable list she could go through over the weekend when she had more time and look for emerging set-ups which for brevity were defined as  Darvas Boxes. Once she finds them she has her risk and position size calculator, a defined stop, entry and trade management instructions to follow.  

We discussed briefly the power of compounding and risk of ruin, and that the primary responsibility of any trader is to reduce draw downs through cutting losses.  Ultimately, however, what I wanted her to walk away with is simplicity and that through process, instilling proper habits, and constructing a solid trading methodology and plan that she believes in will lead to success. She isn't aware yet of all the pitfalls that await those who venture off into the murky swamps of trading without a proper guide or field knowledge so I'm hopeful by inundating her with knowledge that has been passed on by traders she'll start off on solid footing.

What I walked away with was that I had made things much too complicated, needed to streamline my own process, work on my bad habits, and deeply restrict my trading methodology and cut away the extraneous. But then again these are things I've known for some time which leads me to believe I'm still working on my niche and belief in following one system to mastery.   

Now I'm just waiting for the text, “The market doesn't look so hot here.”  

Ending this week here is a list of a rolling 4 week tally of All Time Highs and New Highs.  There is some overlap and some obvious discrepancies such as RSE which comes in with 18 and 14 respectively. I know I missed a day or maybe two while away with family and the New Highs is taken from TeleChart and has a volume filter that acts erratic at times.  There's some good set-ups beginning to emerge from these list.

Developing Process Loops Part 2

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.

My Process Loop

Developing Process Loops Part 1

In its simplest form, a process loop is a set of instructions or a task broken down into units to be completed. One of the earliest process loops I recall learning was putting together a puzzle: Find all the edges and separate them. Find all the the like colors and divide them. Build out the frame. Piece together the like colors and build from the fame inward. In theory a trading process should be just as simple.

Although trading is akin to solving a puzzle, in the initial stages of learning there are no easily identifiable edge pieces and the color tends to be varying shades of gray. What I began to realize early on in developing a process was that I was suffering information overload and didn't have the ability to discern what was useful from what was not. It was further complicated because I had not yet developed my trading persona, so my loop consisted of things I thought I should be doing and it was quickly evident there were severe efficiency issues to tackle. This is not going to be an uncommon plight as there are hundreds of nuances in developing a trading methodology and setups that can be explored. I was feeling stuck and I was spinning my wheels. This is a huge problem as it hindered the overall development and progress of my trading because I wasn't focusing on the pertinent issues.

The irony is that a process loop's intent is to resolve efficiency issues and make task automatic –not unlike breathing. However, I began to realize that there were severe difficulties I needed to address in a number of areas and not knowing which direction to proceed I realized I needed to build a process loop in order to design a process loop. Thus began my quest to understand as thoroughly as possible how to design a process loop that would assist me and keep me focused on important tasks at hand even though I did not have full understanding of what I was trying to achieve in the first place.

For this I received a helpful suggestion from a StockBee member to look at Mind Maps.  Mind Maps is a technique to visualize information and process flows using images. One of the advantages of using this technique is that through images and color a process flow stands out much more sharply then if it were merely typed up document in a monotone color. Certain flows stand out much more clearly when perusing notes.

Additionally by using a more whole-thinking (for lack of a better term) and using multiple parts of the brain along with physically writing down words and drawings, mind maps become more meaningful. The use of images along can speak volumes about what is being expressed and trying to be understood. By using personal imagery my notes took on a personality that conversed with me.

As an example, here are two of the maps I made in trying to clarify a process loop I was trying to develop.  I'm not exactly the most creative when it comes to my doodles but through this process I opened up avenues of creativity I would not have normally explored and I had to get over my ego during this exercise and simply draw no matter how goofy I thought my pictures were. This was a second valuable lesson I received from this exercise that I was not expecting.

Mind Map

Mind Map

For further reading, The Mind Map Book by Tony Buzan and The Back of the Napkin by Dan Roam.