BarroMetrics Views: The Habit of Process (In Attaining Your Trading Dreams)

Last night, probably for the last time (at least for the next 3 or so months), I met with some members of the March 2011 class. I started the session with an observation that

  1. ‘Process’ is important in our quest to attain our trading dreams and
  2. We need to make a habit of those things that make us successful traders.

My take on trading success is: trading success is relatively simple - because the essential habits have been clearly laid out, we don’t have to rediscover them. But they are not easy - because the markets are uncertain and ambiguous and our minds abhor uncertainty and ambiguity. Did you know that when faced with uncertainty, our minds light up the same areas as those that light up when we experience pain? Given the human tendency to do whatever it takes to avoid pain, we need to find solutions to uncertainty - if we are to succeed.

My solution is make the steps in trading as automatic and habitual as possible. That way the process is certain and unambiguous even though the results may be otherwise.

What are these steps?

No secret here - you’ll have read them in many a book. The thing is: how many of you follow it as a matter of course? Turn the steps into a habit is my mantra. Here are the questions:

  1. What bias do I see for this trade? That is: will I go long or short?
  2. Where do I take the trade? That is: against what support (for a long), against what resistance (for a short)?
  3. What do I have to see to initiate the trade?
  4. What is the position size for this trade?
  5. How do I manage my initial risk? How do I manage a profitable exit?
  6. Is the perceived reward:risk adequate (given my Expectancy Return Ratio)?
  7. How have I checked my open positions, and GTC orders (to ensure there are no unpleasant surprises)?
  8. Have I checked my fills (so what I think I did marries with what the broker says I did)?

Only eight questions.  Yet if we make answering them a habit, our bottom line would undoubtedly benefit.

A friend of mine, Peter Ow, reminded me yesterday….

….Every 3 to 4 years, I suffer an attack of Transient Global Amnesia. On the last occasion, I was trading from Sydney. One moment, I was sitting at my desk around 10:00 am and the next moment, it was late in the evening. I remembered nothing of what had occurred in the intervening hours.

What amazed me from my doodling, was this: it was clear that I had become disorientated very shortly after I had initiated a trade. Still, the habit of protecting my capital was so strong that I somehow remembered to put in a stop.

If we want to succeed in trading, we must manage our risk. All the ads in the Singapore newspapers to the contrary, success comes from the old adage of:

  • Keeping position sizing small enough not to risk ruin but large enough to make the returns worth the risk;
  • We make the risk worthwhile by minimizing our inevitable and certain losses; and maximizing our inevitable and certain profits.