Conventional trading wisdom says successful traders follow rules. While rules can be beneficial, trading well doesn’t happen through rules. There is more to effective trading than following rules.
Process Trumps Rules
It is far better to develop and follow a coherent process, rather than depend on a hodge-podge of rules. By process, I mean a series of interrelated steps to identify, execute and manage our trades and ourselves, as well as steps to evaluate how we are doing and how we might improve. Rules are typically made to restrain trader action. A process is used to develop skillful behavior.
Make it Simple: The Before-During-After Process
It doesn’t have to be complicated. Breaking your trading down into what you do before you trade, what you do during trading, and what you do after is a great way to develop a sound trading process. Let’s look at each component in this Before-During-After model.
Before: High Quality Preparation
Before we start trading, it’s important to have a solid trading plan—that’s a basic. It’s also important to prepare for trading. If you are a day trader, for example, you want to identify key levels of support and resistance in the markets you trade. You also want determine how you anticipate the market will trade the next day and where trades are likely to set up. This is you game plan.
Consider how your trading will be affected if you prepare each night for the next day’s trading in the manner outlined above. This is a process approach. Also part of the process is setting performance goals that can help you improve as a trader over time. We’ll discuss this a bit later.
During: Effective Execution
The time to be checking where monthly support is located is not when you are in the middle of a day trade—that’s a Before activity. When trading, your focus is on executing trades: identifying them, making your entry, setting the stop, and managing the trades to exit. High quality preparation gives you a leg up on execution. If the market approaches a key resistance area you’ve identified in your game plan, the trade can be taken with confidence. Knowing that overhead resistance is the preferred place to short also keeps you from jumping into the market too early. Good preparation adds to execution as well as to a trader’s discipline.
After: Constructive Self-Assessment
Once trading is over, it’s time to evaluate your trades and your trading performance. Keeping a journal is an excellent practice and adds to your trading process. You can record your trades as well as your performance, noting what you did well, where you fell short, and what to do to improve.
Constructive self-assessment is a vital part of any trading process. Many traders want to forget their mistakes, but that’s not using them wisely. Having the attitude that every day offers an opportunity to learn makes assessment a task you can look forward to, even when dealing with challenging trading behaviors. Instead of creating a rule, “I won’t do XX,” think about what leads to your unconstructive action and what steps you can take to improve that behavior. If you cut winning trades short, for example, it’s not enough to make a rule, “I won’t cut trades short.” You need to actively work toward holding your trades.
Go Back to Preparation
Bring this into your preparation. As you consider trade locations for the next day, part of your game plan can include holding the trade for another point or two. The next day, when the market sets up for your trade, you know not only where you will enter, but also where you will exit. Following a process like this makes it less likely you will be whipsawed by emotions. Again, after trading is done for the day, assess how you did and where you can make additional improvements. You will soon see that process trumps rules every time.
Assessment is a critical part of the trading process. To help you with your assessment, you are invited to download a free Traders’ Performance Assessment tool at the author’s website. You’ll be given a worksheet and instructions for improving your trading. Just click here.
