Saturday, May 24, 2014

A simple approach to plotting trading improvement

Here is a basic business principle which can be directly applied to your trading.

If you don't like the results you are obtaining, then you need to change some element of your approach. If you don't, and you carry on in the same manner, then you will continue to achieve the same overall results.

Albert Einstein famously put it this way: "Insanity: doing the same thing over and over again and expecting different results."

In trading terms, you need to review and establish in which area(s) you are deficient. It will fall into one or more of the following three categories:
  • Your basic method for determining entries and exits, stops etc.;
  • Your risk management, both on a individual trade and portfolio heat basis;
  • Your mindset - any deficiencies here can lead to mistakes, self sabotage etc.
It is your responsibility to review your performance (or to get someone else to do it for you) as objectively as possible, to determine what areas require improvement.

Once you have identified the area(s) that require change, then you need to formulate a plan which will achieve the desired results.

Then you will need to review performance following implementation of the changes, to ensure they are working as intended.

The difficulty that some traders have is that they go through this process almost too often, other don't do it regularly enough.

Traders can fall into the trap of changing something almost on a week by week basis. They are searching for the holy grail - something which doesn't exist.

You therefore need to conduct a review after a statistically meaningful sample of trades, ideally in different market conditions, levels of volatility etc. Only by doing this will you find out if your overall trading plan is robust enough.

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