Form a team to make trading personally rewarding and stimulate ongoing learning.
Think in Terms of Concepts
“I think the largest shift in my performance came when I began to view markets and price behavior conceptually, rather than being driven by indicators or news reports,” Corey explains. “This was a process that took time and was difficult for me. Previously, I viewed multiple indicators and believed those were the secret to trading success. However, too much conflicting information was not only frustrating, but unprofitable. Even when I decreased the number of indicators, I still struggled to find profitability. My results were often no better than random entries, which was endlessly disappointing. The shift came when I was able to view markets and price behavior conceptually . . .The shift happened slowly and was attributable in part to studying Market Profile information, such as the concepts of trend day, bracketing markets, auction dynamics, timeframe participation, etc. Other concepts were based in the teachings of the early founders of technical analysis, including momentum, price range (expansion /contraction), broader trend structure, dynamics of price behavior, and price patterns (with their underlying reasons: accumulation or distribution, reversal or continuation). Essentially the shift was one towards greater understanding of price behavior and participation by all sorts of market participants . . . To further the conceptualization switch, I also began researching the broader concepts of intermarket analysis, which compares markets to each other, and sector rotation, which details performance of equity sectors and expectations . . . I began to see markets as a grand chess game, which opened up a new method of perception. Markets clearly do not trade in isolation.”
When you think in concepts, you understand why markets move, and that helps you formulate promising trade ideas.
Keeping an Idealized Trade Notebook
Corey explains, “In addition to keeping a simple spreadsheet that tracks trading performance (which is essential in knowing when you’re making mistakes and correcting them), I use a different kind of trading journal that I call my idealized trade notebook. In this notebook, I print off the intraday chart (I use the five-minute chart most frequently) of the stock or index I traded for the day. Also, if there are particular charts I find interesting, I annotate by hand what I deem to be ideal (or best) trades based on my understanding of price behavior and opportunity. Through looking at the charts at the end of the day without the pressure of real-time trading, I am able to see new patterns that I had missed . . . I then overlay my fills to see how close I came to achieving the total potential move . . .This serves a dual purpose of deeper visualization of my performance, but more importantly, helps clarify the distinct patterns and trade setups I use for trade entry, management, and exit.”
By tracking ideal trades, we internalize best practices.
Following Brian and Corey, your task for this lesson is to structure your process of review. One task should include a review of the market day, comparing your trades to the actual moves in the market, so that you are learning both about you and about the patterns you want to be trading. Mentoring yourself is not an occasional activity to be performed during losing periods. Rather, among the best traders, it is a regular process embedded into each trading day. Compare what you did with what you could have done as a great way to track your progress and bring yourself closer to your ideals.
COACHING CUE
When you coordinate your learning with a trading partner, compare your ideas of the best setups for the markets you are trading. If you see markets through the eyes of others, you can enrich your own pattern recognition.
LESSON 85: KEEP DETAILED RECORDS
Two of the respondents to my question—two whose work I’ve followed for years now—independently arrived at similar answers. This is not because they trade similarly. Instead, it’s a reflection of the wisdom they’ve accumulated over years of tackling markets and honing their own performance.
Charles Kirk is a trader, portfolio manager, and author of The Kirk Report blog site (www.thekirkreport.com). He also maintains a portion of his site for members, who are treated to his stock picking tools and selections. Much writing focuses on when to trade; Charles’s forte is selecting what to trade. His blog is among the few on the Web that comprehensively links to articles on key themes that deal with markets and the economy. This is a particularly valuable resource for those who want to stay on top of the market’s larger picture. If you want to see how institutional money might move markets, it makes sense to focus on the themes tracked by institutional money managers. Charles seems to have a knack for identifying those themes.
Jason Goepfert is the editor of the Sentimentrader site (www.sentimentrader.com), which—as its name suggests—focuses on measures of market sentiment. Jason freely offers his perspectives on markets and also shares the results of his tests of historical market patterns. He collects a large amount of data on markets and assembles the data in unique ways to uncover possible edges. These data provide information to guide traders’ thinking, as well as food for specific trade ideas. A particularly interesting facet of his service is the tracking of relative smart and dumb money, including unique ways of reading options sentiment.
In response to my question of what has most helped his self-mentoring, Charles Kirk provided a single, detailed response: his BOO book. BOO stands for Book of Observations, and it is a collection of his trading experience. “In this book,” he explains, “I keep a detailed track record for every trade I’ve made, along with observations about the market and things I’ve learned from others and from monitoring my own success and failures ... My BOO book contains specific and detailed information on every strategy and screen(s) I use, along with detailed performance information over different periods of time. In essence, everything I’ve learned up until now can be found in this book.” Significantly, the contents of the book are organized in a database called do-Organizer (www.gemx.com), which enables him to readily access any idea that he’s written about.
A database turns a trading journal into an active research tool.
Charles indicates that the database keeps his thoughts organized, as a scientist might systematically record data and observations from laboratory investigations. “Treating the market, and a strategy, from a scientific, evidence-based approach in this manner was helpful to me to keep me focused, disciplined, and on the right track,” he explains. “This also helped me to test new strategies and to recognize early when certain strategies stopped working in specific market conditions, so I could adjust and transition my trading as needed.” He also uses the BOO book to track new strategy ideas that he wants to integrate into his own trading. “I consider myself a perpetual student of the market and maintaining and using my BOO book has been incredibly helpful in this regard,” he notes.
Indeed, Charles explains, “Looking back, the biggest mistake of my trading career was not starting my BOO book sooner. It took me several years to understand the importance of keeping notes in an organized manner while using a scientific, evidence-based approach to test and improve my skills and strategies.”
The BOO book is a great example of the creative strategies that successful traders utilize to identify and hone their strengths. I believe Charles’s key insight is that the ideas in his book must be organized to be maximally useful. By placing his journal in a database format, he is able, with a few keystrokes, to access relevant experience from a broad time period. Journals can become unwieldy over time, and it is difficult to pull material from past entries. Increasing his access to his experience has enabled Charles to keep the past relevant to the present as a source of learning.
When I asked Jason Goepfert to share his three greatest sources of self-coaching, he started with an idea similar to Charles Kirk’s.
Write Down Every Idea
“I’ve written close to 5,000 comments publicly over the past six years,” Jason explains, “and also keep a personal journal that tracks more soft subjects such as how I’m feeli
ng, anecdotal evidence, clips of headlines on news sites, etc. I review all of these periodically and find that they are exceptional tools in several respects. They keep me honest (not getting too ahead of myself when trading well and not too down when not), and they also serve as a check for when I’m anxious about a trade. I’ve looked at how I felt right before putting on past winning trades and saw that I was anxious then, too, so what I’m feeling now isn’t necessarily some sixth sense subconsciously hinting that I not put on a trade.”
Talking to More Accomplished and Experienced Traders
Jason notes that he meets many successful traders through his market service. “I am always struck that most of them suffer through the same travails as the rest of us,” he points out. “They all get emotional at times, but they never let that seep into their risk control discipline. And that discipline is constant—there is no deviation from the strict principle that no one trade will sink them or their career. That is something I have written down in front of me. Risk control is paramount, and it is something I use as a mantra.
It’s okay to be emotional; it’s not okay to let emotions change your management of risk.
Always Learning New Things
“It’s a cliche’,” Jason acknowledges, “but I’ve found that the more I learn, the more I discover how little I know. That helps tremendously in trading, as it has helped me to find new ways to approach old problems. Market dynamics are always changing, so we need to find ways to adjust as conditions change. Learning new trading strategies or new ways to test old ones can be very fruitful. It’s a lot of work, but anyone afraid of hard work shouldn’t be risking his or her capital. It isn’t just trading-related stuff, either. I try to push myself into uncomfortable situations and experience new places, new people. That helps broaden my perspectives so I don’t get closed-minded to new approaches.”
What most struck me about Jason’s insights was that writing thoughts down led to self-discovery. When he tracked his trades and emotions, he found that he was often nervous prior to winning trades. This tracking helped him not succumb to nerves when putting on a trade. It is this constant desire to learn new things—about self and market—that keeps trading challenging and interesting as a career. Tracking also helps the trader adapt to shifting market conditions. Jason Goepfert and Charles Kirk are not afraid of the hard work: they spend a great deal of time developing, reviewing, and testing their strategies. There is nothing get rich quick about their approaches to markets. Their record keeping is their way of sustaining a learning curve.
Your assignment for this lesson is to create an indexing system for your own trading journal, so that you can track themes associated with what you’re doing and how well you’re doing it. Tracking means categorizing your trades by strategy/setup, by markets, by results, and by your specific market and personal observations. Keep a journal in electronic form, such as through the StockTickr service (www.stocktickr.com), as one way of indexing your ideas. Another method is to turn your journal into a trading blog, with tags for various topics. Still another approach is to maintain your journal in a formal database, like Charles Kirk. Your records need to be living, breathing entities that you can frequently review for insight and perspective. Imagine your trades organized by market, market condition, trade setup, time of day, and size, so that you can pull up your results for any given market situation. Organized in this manner, your experience may just become your greatest trading coach—as it has been for Charles and Jason.
COACHING CUE
Consider a portion of your journal devoted solely to research: developing and tracking new trade ideas. Charles and Jason continuously search and research for trade ideas as market conditions change. What is working in the current market environment? Which stocks are moving? Which patterns are showing up? Journal about the markets as well as about your trading to help you anticipate opportunity.
LESSON 86: LEARN TO BE FALLIBLE
Dave Mabe is a trader, system developer, and founder of the StockTickr service and site (www.stocktickr.com). StockTickr is a unique resource because it enables traders to track their ideas and performance in an online format that can be shared with selected groups of traders. This Web 2.0 approach to developing ideas and tracking progress enables traders to build their own community of like-minded peers. The StockTickr site also includes an informative blog featuring interviews with traders who share their work online. I particularly like how StockTickr has created a true online trading journal, making journaling a social activity. It gives traders control over what they share and with whom. Indeed, there is huge potential simply in the idea of sharing a real-time journal with a trading coach.
Chris Perruna is a full-time trader and blogger whose work can be found on the site that bears his name (www.chrisperruna.com). His site is devoted to “successful investing through education” and covers topics ranging from screening for fundamentals among stocks to position sizing and charting. He shares his stock screens with readers, along with specific trade ideas. I like how the site enables traders to learn from his example.
Let’s take a look at how these two pros responded to my question about what has been most helpful to their self-coaching, starting with Dave.
Trading Journal
Dave asserts, “A trading journal is by far more powerful than any indicator or platform. It provides the foundation for everything I do as a trader. Your mind can play tricks on you, but your execution data don’t lie. Being able to reflect upon my trading results allows me to step back and view results in aggregate to see how I’m measuring up to my goals.” I’ve seen this with many successful traders: the journal offers a layer of accountability and focus that would otherwise be missing. Dave also stresses the importance of flexibility in goal setting via journals. “Instead of setting a single goal (for example, a certain dollar amount over a time period), I find it much better to set a range of goals from conservative to radical. A lot of traders will set high goals, which set them up for devastation when they aren’t achieved.”
We often focus on what we want to see. Statistics on our trading patterns don’t lie; they focus us on what we need to see.
Learning to Be Wrong
“Most beginning traders have a tremendous need to be right and are resistant to admitting they might be wrong,” Dave observes. “I learned quickly that being right (that is, having a high win rate) doesn’t correlate well with making money. Win rate is overrated—in fact, one of the most profitable strategies I’ve traded had a winning percentage below 30 percent.” Dave is right: most good traders I’ve worked with are not far from a win rate of 50 percent. Their success comes from knowing when they’re right—and taking full advantage—and knowing when they’re wrong—and minimizing losses. Overcoming the psychological need to be right is essential to success; without that, it’s too easy to take profits early and remain stubborn in losing trades.
Automate
Dave recounts, “I’ve spent my trading career trying to remove as much of my discretion as possible from my trading. Many aspects of manual trading systems can be automated. The benefits of automation are numerous: more consistency, less time spent doing trading grunt work, and fewer mistakes. I’ve found that the more automation I have in my systems, the better my results. This includes my manual trading systems all the way to 100 percent completely automated trading systems that I trade.” His point is well taken: even with discretionary trading, execution can be automated so that decisions can remain strictly rule-governed. The simple step of trading with limit orders rather than at the market can make a meaningful difference in performance over time, as traders enter and exit trades at favorable levels, rather than chase markets and get themselves in and out at the worst possible times.
Chris Perruna’s responses will ring true to traders who have traversed their initial learning curves; he focuses on some of the universals of successful trading:
Understand Me
“The most powerful tool I have found in life and
in this specific case, the market,” Chris explains, “is what I, as a person, am capable of doing. I finally understand that personal characteristics that are ingrained in my DNA will only allow me to trade successfully under specific circumstances. For example, I am much more consistent and profitable as a medium-term and longer-term trend trader than as a day trader (even more so on the long side). I don’t need to be everything all the time as long as I continue to focus on the areas that bring me the greatest success. Understanding me has been my holy grail of understanding how to trade the market with consistency and profitability.” Chris’s insight is critically important: you don’t make yourself fit a market or trading style; you find the markets and styles that best fit you. Successful traders trade within themselves: they stick to what they do best and ignore the rest.
The Daily Trading Coach Page 38