Trading is a craft.
Trading is a skill.
Trading requires that you not only develop a way to view people and markets but that you develop the skill to take advantage of them. The great majority of traders may develop a view but never a skill. There are nuances and the need for finesse.
In the compounding complexity of markets, how can we isolate the correct tasks and improve our view and our ability to act on it in line with our strategy?
The difficulty isn’t knowing to isolate. It’s knowing how to isolate.
Before you go further…
Trading is a true craft. If you struggle to manage your impulses, take your stops or respect your daily risk, this post is not for you. You have other issues, generally self control issues that need to be addressed before you can enter into the work of real trading. If any of these remain issues, you and I both know that the work described below will not help.
For those serious about the work, let’s continue.
I break it up like this:
Market View :
When you sit down in the morning and start to build out an idea of what you might see, either in setups, action, etc, does this come to pass and how do you know you are wrong?
If that means you have levels, how can you give them more meaning for your next action? How can you make your work more quantitative? Simply meaning, how can you draw more accurate conclusions from the bigger picture?
A lot of folks have a bigger view they use from time to time but it’s all lip service. If you look at a bigger timeframe chart but don’t do anything with it, there is serious edge missing from your system. Keep it loose but, even as a day trader, you can grow in your ability to read the bigger picture and handle the larger timeframes.
Personal Prep :
“Am I able to get myself into the trading mindset I need for the day?”
This might mean you have a pre-trade routine. I do. It’s very simple but it gets me in the frame of mind. If you have family or work, you may need to really figure out a way that trading fits into that.
I personally need to create space for the work I do in markets. It’s short and intense and if I do it wrong, I am unhappy about it. Therefor, I need to build a real and proper space to “set myself” for the work or trading.
First identify what qualities you need to exhibit. Then find a way to enter into those qualities before the market opens.
Do you need to calm down? Do you need a little boost?
Do you need patience or do you feel some fomo?
If you have a prep process, does it help? Do you need to improve it?
This can take some work as you need to sort through who you are and what might be making decisions for you. Doing this work is what makes trading easy.
Setup Selection :
There are a lot of setups on offer each day. Are you getting the best ones?
Are you trading the trades you want to trade? Are you finding yourself in the best trades on offer in the time or, are you fighting for your points?
We choose each day what we want to trade and how we want to trade. You can always be more selective, more patient, more dialed into the nuances of your work.
There may be a need, esp if leveling up, to hunt for different setups. You are not married to your setups. You can find new ones on new timeframes that may fit your goals better in this moment.
Correct Action :
You could call this a lot of things. The real question however is “Did I do what I was supposed to do?”.
This item is least valued when winning but, exposed intensely when markets shift. First, understand that we all make bad trades. We all deviate from our method. The trick here is just to be able to track it. No need to hammer yourself with criticism. Just track if you were on point or off.
When the time comes and the market shifts, you want to be able to say “I lost but I did my job”. It’s the trader who enters into a drawdown and doesn’t know why they are in drawdown that is likely to spiral.
Ratings :
A great way to spot weakness here is to give yourself a daily rating.
1-5, did the way I do this step help me today?
Why or why not. What can I improve?
The idea here isn’t that you have to be brilliant or perfectly controlled. It’s that you have to have a process for iterating on your work while operating inside of a dynamic environment. A simple feedback loop.
What I have found :
I’ve been through a few periods where what I was doing well stopped working. We’ve all been there. The market catches a bid and everything gets easy. Even selling is easier in a bull trend. Then, things turn and we’re upside down for a minute.
The trick here isn’t to avoid being off our game. That will happen. The idea is that we have a process in place to understand what is wrong, work to understand the issue and then find a solution.
My recent drawdown.
I went through a bit of a slump there for a few weeks. Long story short, I had been scalping rotations inside smaller timeframes. It’s easy to do, my system was locked down and it fit my busy schedule. I would scalp for the fist 2 hours of the day and close up shop.
However, when vol picked up, I dinged my daily loss limit a few times and had to take a step back and ask myself, “what has gone wrong?”
Was it my read?
Was it my discipline?
Was it market conditions?
What I found was that it was all three, really. Discipline was the least problematic but still a concern. My read was loose and I had assumed the action would continue as it had. I had not intentionally made this decision, I had just gotten into a routine.
Don’t get me wrong here, I was not just mindlessly BTFD. I was playing both sides as you do in a late cycle bull market. The real miss match was in my read + conditions.
Knowing that I can execute well and have control over my click, it was just about adjusting my read and finding new setups or methods for the current environment.
I had long wanted to make these adjustments but, as you do, I had put off re-evaluating since what I was doing was working. It was as good a time as any to step back from active trading for a moment, make my adjustments and re-enter the market with a new intention.
What did this lead to?
Because I have this process setup, I was able to adjust over a 14 day period. Two weeks to adjust for the new read and slightly new method and begin to take advantage of it. This means I was able to backrest a couple new ideas, re-visit 9 months of journals and images of charts I’ve saved that seemed relevant and really dig into my strengths and weaknesses.
Build yourself for change
Nothing stays the same. Not in life and not in markets.
Most people come in and look for that one perfect edge that will allow them to leave their day job or whatever. Don’t be that guy. Instead, build a process that allows you to be molded by the moment. Something robust but specific. Something that will open you up to whatever the market has next.
Great traders throw away more quality edges then most traders even know exist.