The expectancy gap and performance leaks

When trading, you are free to construct your own methodology and set of rules to use - what markets to trade, triggers for entries and exits, how much equity to risk etc. That's the easy part.
 
For the majority of us, the difficult bit is ensuring you keep operating within that framework.

Building your own approach to the markets and the decisions and actions you take are entirely within your own control. But you have no control over what the markets do. Ideally, you want to react to the market's price movements, and trade within the confines of your carefully constructed framework.

Finding your own holy grail

While many people say there is no such thing as a holy grail in trading, I happen to believe there is, but not in the generally accepted sense of some magical set of entry and exit parameters. Furthermore, I believe everyone's holy grail will be personal and unique to themselves.

Finding your own holy grail is a two-step process:

A visual version of tracking trading efficiency

In the Chris Sayce podcast on Chat with Traders, he talks about keeping two portfolios and equity curves - one relating to his actual trading, the other being what he calls his 'Discipline' portfolio, where he is able to track the theoretical performance had he followed his own trading rules to the letter. As he mused, the returns of the theoretical portfolio far outperformed reality. The closer his equity curve can mirror that of his Discipline portfolio, the better his ultimate performance.

This is a visual version of tracking what Van Tharp calls trading efficiency. He advises keeping a log to track your mistakes and quantify them in terms of R. I talked about this here.

Three year performance review

The end of June marks the completion of the third year since I changed my stop rules back in the summer of 2012. The results achieved I think speak for themselves - despite getting into winning trades only a third of a time, and enduring a horrible run of losing trades last year the annualised return over the three years equates to just under 80%.

Make your goals process related

A lot of traders talk about having written goals they work towards, and in the main this is good advice. One thing I would avoid however is making these goals financially based, or to give them a specific time limit.

One thing traders have to accept is that you cannot force the market into anything. If you are utilising a trading approach that has a positive expectancy, then you can only take what the markets are prepared to give. There will be periods where your approach works better than others. You have to accept that.