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Taking Your Trading to the Next Level

Friday was an interesting day for me in the market.  It captured a lot of what I've been doing right as a trader and a lot of what I still need to accomplish.  As I shared with several colleagues, my cycle work has been looking toppy.  During the recent market strength, sector participation has been uneven.  Yield-sensitive shares have rocketed to new highs, while many others have lagged.  Banking shares, in particular, have looked weak.  All of that meant that I went into the day leaning to the short side.  Given an important jobs number coming out, however, I took no position into the event.  The number was uber-strong, the market rocketed higher, and trended higher for most the session.

In the past, I would have traded my bearish view, hit my stop, and taken my loss.  In my recent trading, I don't take a trade unless everything lines up.  The tape action contradicted my cycle view and I stood aside before the number--and after the number.  I never traded.  I finished the week at my high water mark for the year.  By trading super-selectively, I've sustained a high hit rate and a high Sharpe ratio.  The average daily volatility of my P/L, however, is quite low.  By waiting for everything to line up, I'm making money when I play and I'm not playing all that much.

Early in the day on Friday, after the release of the number, I said to myself that we have a potential trend day in play.  Buying early weakness was a good trade, albeit not the great trade that I've looked for in waiting for everything to line up.  By not taking good trades and only taking the great ones, I've been maximizing my risk-adjusted returns (how much I make per unit of risk taken), but leaving a lot of absolute returns on the table.

Friday was a nice illustration of how I've become a good trader--and how far I need to go to become a great one.  But taking trading to the next level means the trading ship has to leave the safe harbor.  In my case, it means moving out of the comfort zone of trades where all lines up to take trades with solid, but more uncertain odds.  From the weight room to the trading room, all growth occurs by pushing the limits of comfort.

There are a few worthwhile takeaways from this reflection on performance:

*  You can't improve your performance if you don't understand your performance - I can quote my P/L, average drawdown size, hit rate, Sharpe ratio, average daily P/L volatility, etc. at the drop of a hat.  The performance stats don't lie.  I'm either getting better or worse, doing things right or wrong.  Having detailed performance stats allows me to have a detailed understanding of performance.  The trader with few trades, a good hit rate on trades, but negative P/L has a very different problem from the trader who has many trades, a poor hit rate, and the same P/L.  If you don't keep score, you can't improve your score.  

*  Qualitative information counts as well - Sometimes the best information comes from trades not taken and decisions not made.  Those won't directly show up in performance stats, but may be essential to understanding our strengths and weaknesses.  Friday's non-trading, for me, carries a lot of information, but won't stand out in my end-of-month or end-of-year stats.

*  A great deal of information can be gleaned within performance curves - When in the past 12 months have we traded best?  Worst?  What were the market conditions at those times?  What specific things were we doing right?  Wrong?  Sometimes, in playing to our strengths, we create new vulnerabilities.  What I've done well in trading is take the drama out.  Drawdowns have been limited; the P/L has ground higher.  In taking the drama out, however, I've created a new comfort zone.  The shape of our performance curves invariably tell an important story.

The bottom line is that coach is a verb, not a noun.  It's something we must do, not a person we hire.  If we are to reach our performance potential, we must be both coach and performer, studying ourselves as intensively as we study markets.

Further Reading:  Becoming Your Own Trading Coach
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