Profiting From Your Best Practices
Consider the following scenarios:
- A hospital studies the treatment records of 50
surgeons and finds that 10 of the doctors have a much lower complication rate
among their patients than the other 40, when adjusted for the difficulty and
risk of the procedure. The Medical Chief interviews and observes these top 10
surgeons to find out what they’re doing differently from their colleagues.
The results of the study lead to a set of guidelines that improve surgical
care outcomes across the entire hospital.
- An automobile manufacturer finds that one of
its plants has a much lower defect rate than the others and yet is just as
productive. A team of managers goes to the plant to observe quality control
procedures. This leads to changes at all of the plants that improves auto
quality and consumer satisfaction.
- A pit crew for a NASCAR driver videotapes each
of its practices and races and measures the time it takes to get the car back
on the road following routine stops. By watching the videotapes and comparing
the quick and slow times, the crew figures out how to position themselves on
the track to shave tenths of seconds off their times.
Each of these situations is one in which best
practices guided performance improvement. We can think of best practices as
continuous learning tools, in which we learn from what we do best–and learn to
do it more often.
What are your best practices as a trader?
Do you even know?
Incredibly, many traders keep journals and
records, but never think to isolate their best practices. They simply don’t
know what they do well and why it works for them. As a result, they can’t learn
from their successes.
Here are a few best practices I have identified
in my own trading:
1) I enter a position with a relatively small
portion of capital and add to the position within a short amount of time if
market conditions continue to look favorable. My research of my own trades told
me that many of my losing trades started out in the first few minutes as
losers. The winners were either winners in the first few minutes or hovered
near breakeven. With a small initial position, I get smoked when I’m small and
ride winners with larger positions.
2) I religiously follow what large traders and
the majority of stocks are doing. Consistently, my winning trades go with the
flow when large traders are dominantly hitting bids or lifting offers. My
winning trades also ride the tendency of the broad market to trade at the bid
price vs. offer (as measured by the NYSE TICK).
3) I put a trailing stop on my intraday P/L.
Quite simply, if I’m up a decent amount of money on the day, I’ll only allow
myself to lose a portion of it before I stop trading for the day. A winning day
thus never turns into a loser, but I can continue to selectively pursue
opportunity.
4) I trade the most volatile instruments that
are highly correlated to my main market, the ES futures. So, for instance, I’ll
add a unit of capital to the Russell 2000 futures rather than double up in the
Spooz. My research found that what I was trading was adding as much to
profitability as how I was trading (specific setups).
5) I trade almost exclusively during morning
hours, when I have my best feel for the market. My research has found my
afternoon trading to be, on the whole, no better than breakeven. All my profits
have come from morning trades.
Obviously, your best practices will be different
from mine. The idea is not to mimic someone else, but to be more of who you
already are when you’re at your best.
Brett N. Steenbarger,
Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of
The Psychology of Trading (Wiley, 2003). As
Director of Trader Development for Kingstree Trading, LLC in Chicago, he has
mentored numerous professional traders and coordinated a training program for
traders. An active trader of the stock indexes, Brett utilizes
statistically-based pattern recognition for intraday trading. Brett does not
offer commercial services to traders, but maintains an archive of articles and a
trading blog at
www.brettsteenbarger.com and a blog of market
analytics at
www.traderfeed.blogspot.com. His book,
Enhancing Trader Performance, was
recently released for publication (Wiley).