This Isn't the Office
Unlike the outside world, trading itself should be a very simple, and repeatable task once "tuned in". This year I have really focused on separating the signal from the noise and taking less trades but more being relentless about following my trading plan.
Unlike my work and office environment, the compelling drive to do more (in general) has done nothing but exhaust me with little reward. That neurotic drive to do more, be more and be "busy" can have some adverse implications when we apply it to trading.
I have gone through the motions as mentioned in a previous blog(s) of doing everything but getting nowhere. Although trading in itself is a process, had I simplified my trading years ago I would be wealthier and less stressed if I made some fundamental changes.
Starting Right is Important
When I began trading I felt I always had to know everything (Holy Grail Syndrome) there was to trading and apply myself with the same intensity I used in my career. More books, courses and strategies - surely then I will make money. Yes, baseline knowledge and skills are important but people tend to stay stuck at this level and never truly learn anything. Many traders look externally for sources of knowledge but seldom reflect on what they are doing on a daily basis and in actuality.
"No sense of self, needing daily affirmations of self help
Yo it's right in front of your grill stop looking everywhere else." - Talib Kwali, 2000 Seasons
So we flip flop between systems and nothing works, even though we haven't traded a system in reality. Now we are pissed off, demotivated and have a whole series of emotions to deal with before we even begin trading. If there is one thing we can all agree on, trading emotionally vs objectively helps us construct our own demise. Once we get into a negative groove, the mistakes compound and confusion ensues. Typically the results are the same. Before giving up, I think there is an easier solution - simplification.
What Does Noise Look Like
After constructing a self- assessment or trade review based on my journal, I found some very interesting points and patterns. They fell into a fistful of issues and I think other traders have the same pitfalls:
- Making assumptions about the market and over-trading.
- Emotional and fear based reactions to adverse price moves
- Acting with "irrational exuberance" when winning and dialing it up too quickly.
The Trading Journal Data
Having dissected my journal, I got stuck into some specific "aha" data points that would be the focus of what to change. Most traders should be able to empathize:
- Had I only traded two patterns (Cup and Handle, VCP) I would have returned 84% (vs 9%)
- I had too many positions on at once and was not concentrated enough (FOMO). It was near impossible to stay focused.
- If I avoided taking "F" trades, I would have increased my profit by 23%
- Short term reactions of rapid buying and selling. Typically when the market came in hard. I would sell and to my chagrin my positions would have never been stopped out!
The signal was so clear and obvious (like most things in hindsight) that I was in shock. The same patterns and issues have plagued my trading for years, I needed to find a way to stop over trading, taking poor quality setups and reaching into the garbage can to find "That one stock nobody else knows about".
Trying to outsmart your system based on assumptions, fear and general out of whack behaviour always ended in intermittent success but constant frustration.
The Psychology Driving the Behavior
The overwhelming evidence of this review suggested over trading, which is typically conditioned by automatic reactions we've had to trauma - in my case, some significant trading losses in the past. I became attached to the results instead of the process with devastating consequences. We are not our trading system, that is something on it's own, typically something we don't follow very well.
When I was writing my psychological notes. It was obvious I was not trading my system - but why? I know it works, I have made and still make money from it and being totally transparent, I would be filthy rich if I could just follow the rules.
Knowing this data and continuing to react to it in the same way with the autopilot response is incredibly painful and emotionally challenging. I made a promise to myself that I would change this in 2019 and the results have been life changing.
So at this point I moved into what was working. What methods and techniques (habits more importantly) were adding to my P/L and self-esteem. I boiled it down to a few simple things that seemed to sync with my big wins.
People undervalue just how hard it is to be objective. Trading is an objective art. How can you see the truth of what's happening if riding the emotional roller-coaster? Even moreso, how can you take all of this critical feedback and use it construct a trader? Something needs to change in how much information we consume.
I found looking back is a good way to inform new decisions but needs to be done so in a highly positive and confidence reinforcing way. Far too many of us beat ourselves up for mistakes and are held back by crushed self-esteem. It's important to focus on what is working to focus on that vs the mistake.
Many traders starting out don't and will never see the value of writing down emotional triggers and building habits and or relaxation techniques to switch off autopilot. People can't confront themselves about keeping the house clean - yet they want to make millions!? This delusion makes exchanges rich and traders poor.
The 5 Steps I Took to Reduce Errors
“Most people overestimate what they can do in one year and underestimate what they can do in ten years.” - Bill Gates
After reviewing my results and identifying where I was veering off course. I put a few steps in place to limit what I see and get my mind away from the "noise" to focus on the signals. A few things I did:
- Limiting social media - which I wrote about in-depth here
- Reducing Screening Criteria
- Optimizing my Trading Workspace
- Using a Checklist
- Quarterly Trade Review
Let me go into more depth on a few of these:
1. Limit or Kill Social Media
I wrote up about this in-depth I still think going off of Facebook and Twitter were the best decisions I've made, not only for trading but for time, mental health and relationships. It's too hard to avoid tips and "Guru" insights from keyboard warriors. Burn it all, don't make excuses.
2. Reducing my Screening Criteria
This probably was one of the most fundamental changes in my trading.
Prior to reducing and limiting my search criteria I had to trawl through 500 or more stocks, IPO's and other assets to find "the perfect" setup. It'a amazing how you can create illusions doing this. I would add tips to my watch-list or things I heard from friends and the end result would be a mish mash of my strategy, some tips and "exceptions" because I suckered myself into some cheaper listings.
After an intense chat with Mark Minervini, he said to me "I used to give guys the task of trading only the top 5% RS names and one or two patterns, if they couldn't make money on this then they couldn't make money on anything". Good enough for a Market Wizard, good enough for me. So I incorporated this into my scan:
This masking of the other 8000 stocks typically returned a list of around 250 stocks comparable to the IBD Growth 250 and for a fraction of the price. It was far easier to select the highest alpha names and keep my search limited to the best candidates.
The stock market is vast. Reducing what I can see is likened to putting blinkers on a horse. The temptation to leave the road is limited when all you see is what's in front of you. If you want help building a screener like this make sure to reach out.
Credit to stockbee who helped me find the screening criteria!
3. Optimizing Your Workspace
In very similar fashion, having a clear step by step process on reducing what you see has been incredibly useful. If you are shooting from the hip and taking too many trades, this was one of my very best moves so far in crushing that Habit.
My full workspace can be seen below. I factor in as much as possible - less color and "stimulation", a few key moving averages and volume is all I need. In the past I had a myriad of screening tools, indicators and fanciful "news". My god that was stressful.
Below is exactly what it looks like now:
This is broken down as follows:
- This is my stock trading screener which is fully automated and produces around 250 stocks
- I move the highest remaining names with nice price action into the list below that - typically here I have around 40 to 50 stocks
- The best looking stocks that are close to my buy points are added to this step, I really only like having 10 names if not less in this list
- My current purchases
Then all my homework revolves around maintaining this list every evening for about 1 hour in total, moving my stop losses and managing my trades. The only exception to this rule is managing IPO's which are slightly different. It's just another screener like number 1 but with different criteria.
Having this clean and highly functional space is noise reduction 101. Just like any profession, keeping organized and on top of things is essential and to do that we must manage a ton of information in the most impactful way possible.
4. Using a Checklist
I have to admit, I totally suck at using checklists because they are super tedious and frustrating. The problem with this statement is that it gives insight into why I am not getting triple digit returns this year!
I won't go into too much detail on this but my only recommendation is to make something that works for you. A snippet from my own checklist can be seen below:
The prior steps are pretty complex so I don't want to destroy the message here. The key point is that defining your buy, sell and other points are quite literally the difference between success and failure in trading. My goal for 2021 is to redefine and reduce this list and automate it as much as possible. As trading is about experintial knowledge, I will wok this out in the coming weeks and months based on what works/doesn't.
5. Quarterly Trade Reviews
Reducing trading reviews to quarterly is something I did this year. To avoid duplicated efforts, please see this blog on how to conduct a successful trade review. I highly recommend watching Fred (Lonestocktrader) review here. If you combine this approach with a trading journal you can use this feedback to further simplify, define and execute your trading system. The overarching message here - keep it simple, focus on the positive nuggets from the process and put it back into your trading process.
Getting familiar with your trading style, strategy and tools is a challenging but exciting process if simplified and systematic. There is tons of noise, news, FOMO and other temptations in the market to operate in any other way.
Without defining, planning and tracking progress in a clean, simplified and digestible way the stock market and trading in general becomes a harsh and self-esteem destroying environment. The challenge is to be fully accountable and create the environment that works for you.
Unlike the office. Nobody is going to tell you what to do, this one is on you!