The Trading Process: Know What You Are Doing
What I am going to say here can be interpreted as a very easy concept. At a first sight, it may appear even obvious to most of you. What you may not realize, though, is that this is one of leading factors for new traders to the ultimate failure. In fact, once you’ve fixed this one, you will be in a great spot to improve your results dramatically.
This is something so precious that every successful trader is taking care of on a daily basis. Moreover, countless trading accounts have gone to zero because of a deep misunderstanding of this notion. The sooner you figure this out, the faster you’ll bring your trading to the next level. You may be wondering what it is I’m talking about? Pretty straightforward, knowing what you are doing!
I’m pretty sure you’re turning your nose up right now. And I can’t blame you, it sounds so crystal clear that doesn’t apparently feel like you’re going to get any added value from reading this article. Since I agree with you so far, I’m just asking you to go further to let me better explain what I mean.
One of the best quotes I’ve read when I was still working as an automotive engineer simply states:
“If you can’t describe what you are doing as a process, you don’t know what you’re doing.” ― W. Edwards Deming
Once you completely understand this concept, you’ll be ready to gear up for better trading performances. Indeed, this would have meant you’d have shifted to a process-oriented approach which will give you a significant edge on result consistency over the long run.
The Process-Oriented Approach
William Edwards Deming was a successful engineer, statistician, professor, author, lecturer, and management consultant. One of his most recognized work has been the key contribution to the PDCA (plan-do-check-act) which has been used to successfully enhance many organizations for the control and continual improvement of processes and products.
Even though he applied most of his studies to improve the overall quality of product manufacturing, it is amazing to see how much his theories can be applied to different fields, including trading. Since I want to give you some practical guidance of this paradigm into trading, here is my proposal that revisits this cycle into PTCA (plan-trade-check-adjust) specifically designed for trading.
PLAN
Build up your daily routine in a structured manner so that this process can be repeated easily every day. Make a watch-list that includes trading a manageable number of candidates as well as the defined strategies for each specific setup. For each possible trade, establish in advance your profit targets as accurately as possible and define your stops with the same care.
TRADE
Just “trade the plan” and collect data for the analysis in the following “CHECK” and “ADJUST” steps.
CHECK
Study the actual trading results (measured and collected in “TRADE” above) and compare against the expected results (targets from the “PLAN”) to look for any differences. In particular, look for any deviation in implementation (including the motivation of these deviations) from the original plan. Also, look for the overall quality of the plan to enable the execution. Keeping track of your statistics is what you need to have for the next step called “ADJUST”.
ADJUST
If the CHECK shows that the PLAN that was implemented in TRADE is an improvement to the prior cycle, then that becomes the new standard for how your trading should act going forward. If the CHECK shows that the PLAN that was implemented in TRADE is not an improvement, then the existing standard will remain in place. In either case, if the CHECK showed something different than expected (whether better or worse), then there is some more learning to be done and that will suggest potential future PDTA cycles.
Now, you can easily compare this one above with your current habits and see what you may be missing at each step of the cycle. Removing improvisation completely from your daily routine is the differentiating factor between a hobby and a profession. Following a paradigm like this one will help you get rid of the emotional part of trading and, so, discharging the worst ingredient for bad decision-making process.
Being educated about the best strategies to implement and being part of a highly knowledgeable community are the pre-requisite to succeed in implement this approach. If you’re willing to put yourself into this journey, I strongly believe that Warrior Trading is the best source to start from.
See you in chat-room.
Trade safe,
Roberto Barbaro