THREE ESSENTIAL INGREDIENTS OF EFFECTIVE TRADING PROCESSES

Efficiency is of limited value if we're not effective. We not only need to do things right, but ensure that we're doing the right things.

What goes into successful trading processes? Here are three hallmarks of effectiveness that I've observed across a variety of professional traders:

1) Original Research

I recently spoke with a trader about the difference between trading ideas that you develop for yourself vs. ideas that you borrow from what your read or hear from others. The successful traders I know do their own work. Yes, they discuss ideas with people and, yes, they read research, but where they add value is in how they synthesize that information. Without digging into ideas on your own, you never truly achieve a sense of discovery and conviction in those ideas. As a result, it's easy to give up on the trades as soon as they encounter adverse price movement. The best trading ideas are distinguished by their breadth (combining information across time frames and/or markets); depth (level of detail and understanding); and originality (looking at new things or viewing old things in new ways). Successful generation of ideas goes beyond consensus thinking.

2) Planful Expression and Management of Trades

 The successful traders I know put considerable time into structuring their trades (finding very good risk/reward) and managing their positions (scaling in or out of trades, managing risk/reward in real time). One trader recently wanted to benefit from an anticipated decline in stocks, but was concerned about sharp short-covering rallies. He bought a long dated put spread and limited his dollar exposure to the trade. That allowed him to ride out market choppiness and take a nice profit on the position when volatility expanded. The thoughtful use of options enabled him to participate in a move that others missed because of getting stopped out due to market noise. Yet another trader I know achieved a similar end by holding modestly sized core positions, trading with wider stops, and tactically taking profits when markets became stretched in a favorable direction. Money management is central to the effectiveness of trading processes.

3) Detailed Reviews

The best trading processes include an element of quality control. By periodically reviewing performance and highlighting areas for improvement, traders ensure that they are learning and developing even as they may be drawing down. As I've emphasized elsewhere, those detailed reviews also include episodes of very positive performance. Traders who reverse engineer and map out their strengths are in a good position to turn best practices into process-driven habits. Trading reviews provide the foundation of trading goals, and trading goals provide the template for future trading plans and actions. Without reviews, goal setting, and further reviews, trading experience will not turn into trading expertise. We learn, not from experience, but from what we do with our experience.

How effective is your trading? What are you doing that is special and unique in each of these three areas? If we don't do great things each day, our experience is unlikely to add up to anything great.

SOURCE: This article is written by Dr Brett Steenbarger @http://traderfeed.blogspot.in/

DISCRETIONARY VERSUS SYSTEMATIC TRADERS

The difference between traders that rely on their instincts and chart reading abilities and those who are pure system traders.

DISCRETIONARY TRADERS..

…trade information flow.

…are trying to anticipate what the market will do.

…are subjective; they read their own opinions and past experiences into the current market action.

…trade what they want and have loose rules to govern their trading.

…are usually very emotional in their trading and taking their losses personally because their opinion was wrong and their ego is hurt.

…use many different indicators to trade at different times. Sometimes it may be macro economic indicators, chart patterns, or even macroeconomic news. They are very “flavor of the month” in that regards.

… generally have a very small watch list of stocks and markets to trade based mostly off the time on their expertise of the markets they trade.

SYSTEMATIC TRADERS..

…trade price flow.

…are participating in what the market is doing.

…are objective. They have no opinion about the market and are following what the market is actually doing, i.e. following that trend.

…have few but very strict and defined rules to govern their entries and exits, risk management, and position size.

…are unemotional because when they lose it is simply that the market was not conducive to their system. They know that they will win over the long term.

…always use the exact same technical indicators for their entries and exits. They never change them.

…trade many markets and are trading their technical system based on prices and trends so they do not need to be an expert on the fundamentals.


While discretionary traders are busy trying to digest what fundamental news and information mean, systematic traders are taking the signals they are getting from actual price movement in the market. Systematic traders are not thinking and predicting what the market is going to do, they are reacting to what the majority is doing based on their predetermined system’s entry signals.


For the average trader being a 100% Mechanical System Trader usually maximizes the chance of success in the markets, especially if you are using a historically proven profitable system. If you are removing the emotions and ego out of your trading and are controlling your risk of ruin with proper trade size and stop losses, then you have probability on your side of joining the consistently profitable traders in the market.


Now what sort of trader do you want to be?

SOURCE: This nice article is written by Steve Burns @ http://www.newtraderu.com/