We ofttimes demand heed that traders, to last successful, should “follow their process.” But what actually goes into trading processes? The recent post described a few mutual elements of successful trading. One of those was selectivity. Faced alongside an interplanetary space reveal of possible trades in addition to times to trade, fifty-fifty the active trader must notice or hence agency of filtering out the bulk of possibilities in addition to focusing on the smaller reveal that offering distinctive opportunity.
How does such selectivity work? I would debate that every successful trader in addition to portfolio managing director filters trades yesteryear iii criteria:
1) An Idea – The trading thought expresses the underlying logic of the trade. It is what gives the merchandise a potential positive expected return. The thought could last that endangerment assets volition ascent when the charge per unit of measurement of alter amid a host of macroeconomic indicators is positive; the thought could likewise last that a company’s shares volition autumn if they sense a parabolic ascent because of advertisement non grounded inwards fundamentals. The trading thought defines the champaign of opportunity.
2) An Expression – Any trading thought tin last expressed inwards a multifariousness of ways, in addition to those expressions ultimately determine the risk/reward of the trade. For example, daytraders mightiness run several scans of stocks inwards the premarket to seat promising “pump in addition to dump” candidates. Portfolio managers mightiness limited a sentiment inwards currencies, equities, and/or rates, depending upon the positioning inwards those assets in addition to how they mightiness agree together inwards a portfolio. An appear could last inwards options, inwards a relative value trade, or inwards an outright long or curt cash position. Each brings dissimilar risks, dissimilar rewards.
3) An Implementation – To a surprising degree, the agency inwards which a merchandise appear is implemented impacts its ultimate profitability. Two traders could pick out the same trading thought in addition to produce upwards one’s heed to limited it alongside a long stocks trade. One trader predicates entry execution on strength, buying when at that spot is upside cost confirmation in addition to hence adding to the seat on strength. Another predicates entry execution on weakness, buying pullbacks inwards cost in addition to scaling out on strength. The profitability curves for the ii traders over fourth dimension volition appear radically different. Indeed, for the ES futures, the old implementation strategy could pick out easily led to apartment to negative returns fifty-fifty inwards the recent bull market! Placement of stops, sizing of trades–all of these greatly behave upon trading outcomes.
I would advise that a genuinely process-driven trader has studied each of the iii areas above, hence that all iii contribute to an overall trading edge. The process-driven trader should last able to justify the merchandise on all iii criteria, in addition to the process-driven trader should last able to review surgery across the criteria to determine where improvements tin last made. There is much to a greater extent than to profitable trading than arriving at skilful ideas, in addition to at that spot is much trading of randomness inwards the house of skilful ideas. Not all who follow routines are process-driven.
There are likewise psychological processes underlying success across surgery domains. Further Reading: Feeding Your Head And Developing Your Self