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The Process Gets You Paid in Trading
By Price Headley | Published  12/23/2005 | Currency , Futures , Options , Stocks | Unrated
The Process Gets You Paid in Trading

Do you remember that putt that Tiger Woods hit at the Masters this year? If you didn't see it, Tiger had a high pressure putt attempt during his final round. Everyone was deathly quiet as the ball rolled slowly towards the hole and decelerated to a snail's pace only to finally hang on the lip for what seemed to be about 2 seconds, then CHA-CHING it dropped in the hole! Well, it wasn't some unseen force that dropped that putt, it was the culmination of years of practice translated into a putting stroke that is nearly perfect.

So how does this relate to trading? Very simply, in every profession, there is a process that hugely successful individuals repeat week in and week out. It doesn't matter if we're talking about salesmen, professional athletes, or lawyers. The great ones have a process that they execute almost automatically. So, if it's the process itself that pays such huge rewards, traders should ask themselves this question, "how much time should I spend developing and honing my process?"

Let's look at another example. Champion poker player Doyle Brunson was watching a video of himself for learning purposes. He noticed that when he bluffed, he did not bother to count his chips. Whereas when he had a good hand, he counted his chips. He learned that other players were picking up on this and using it to take money from him. Once he realized his problem, he changed his process for the better. By working on his playing process, he saved himself tens, if not hundreds of thousands of dollars in about 1 hour of video review. Doyle could have spent 40 hours that week playing harder to earn money, but instead he spent only one hour in review and made a small fortune from it. So review followed by process change is a highly-leveraged way to increase earnings. Imagine that. Is it possible that one or two mistakes a trader makes is costing him thousands of dollars every year? Absolutely. Make weekly reviews your new habit.

Now that you can see the dollar value of process review and development, devote yourself to at least 1 hour per week. During the week, we observe and then execute our plan according to our predetermined trading systems. So during the week, there is little to do to improve performance. For most traders, the majority of each work day is spent in execution or watching stocks. So traders should look at the review time as a bountiful harvest. Gather up all you learned from the week, and feast on the new observations and knowledge. Profit from our newfound knowledge.

Natural Process Development

A long time ago, I was taking a driver's safety course and a man in the room said that he refused to wear his safety belt because he once was involved in a wreck in which his car caught on fire. He believed that if he had his belt on he might have been trapped in the car and burned badly. Think about what happened there. The man had a traumatic experience and it changed his perception. He probably knows as much as everyone that over 95% of the time crash test dummies suffer less injuries while using safety belts and less than 5% of crashes involve fire or bodies of water (trapping situations).

In short term trading, the perceptions of less effective traders are changed especially by traumatic and exhilarating trades. For example, a trader might have a system that works 74% of the time only to have the system produce a losing position causing the trader to switch to a new system. The following month, the same trader might switch to another system based on the experience he had in the previous month. This type of system development is both treacherous and inefficient. This type of systems development happens quietly and often without the trader knowing. Beware of this and avoid it. Systems should only be based on long term historical data and long term, recorded experiences. Otherwise, traders can be blown around helplessly like hot air balloons.

Even individuals who are just beginning to develop systems must be cautious. If we base our systems on historical data, the data itself needs to be good. The stock market went sideways from 1962 to 1982, then straight up from 1982 to 2000, and finally straight down from 2000- to 2002. Your data, should represent normal stock market conditions instead of being partial to a particular type of trading environment. That is, your data should contain up years, down years and sideways years in the market. If your system works in all thee conditions then you will have a high probability of success in trading.

So there we have it. Take these steps and become a more effective trader. 1- Spend at least one hour per week (use the same day and time every week to help develop the habit) looking at your system and trying to improve it. 2- Only develop or change your system based on long-term data or long-term recorded experience. Don't let short term swings affect your system or your sanity. Be disciplined, and trade well!

Price Headley is the founder and chief analyst of BigTrends.com.