Trading Homework
Beads of sweat dripped off his brow into his eyes, blurring his vision. He felt the all too familiar burning in his legs. Every muscle in his body cried out in protest after enduring hours of this abuse. One final push and it would be over.
His racquet swung violently, slamming the ball deep into the court. His opponent struggled to get to the ball and was unable to return it, pushing the ball into the net. The match was over. His arms punch the air and he bellows out a triumphant roar as Andy Murray won the oldest tennis tournament in the world, Wimbledon.
Like professional athletes of any sport, it takes a lot of hard work for traders to acquire and maintain the skills needed to thrive as a trader. In addition to training each day, you need to review and critique how you performed during your most recent matches (trades). At this elite level of performance success is all about making minor, incremental improvements. Adjusting the timing of your entry, optimising your trade size, tweaking your money management rules.
It all starts with doing your homework on your opposition. Andy Murray knows his next opponents strengths and potential weaknesses well before he steps on the court to face them just as any competitive sports team would. You know your opponents are analysing your past performance so why give them an edge on you by not doing the same to them?
Teams such as the Australian Wallabies look at their upcoming opponent’s strategies, set moves and general playstyle to gain an overview of their opponent’s strengths and weaknesses. They will then drill down into these characteristics to see what can be exploited for an advantage. As an example, the Wallabies might identify that their opponents are not good at catching high balls and so develop a strategy to kick high balls often and put pressure on the catcher.
Great traders are charged with the same responsibility as the Wallabies. Analyse the markets you trade. Here are some of the questions you should be asking yourself when doing your homework on your chosen markets:
How many points (or cents) does my market move in a day or session i.e. what is its average range? E.g. If you are trading an index like the Dow Jones or the S&P500 you need to look and see how far that market moves on average each day. The same goes for other markets like FX. You should look back at the currency pair (e.g. GBP to JPY) and see how far it moves. Note that there are three sessions of trading per day for FX and so the average range for each session should be calculated.
Does my market react strongly to news or specific types of news? American share markets for instance can move strongly after things like U.S. Non-farm Payroll numbers or quarterly GDP numbers are released. You should always be aware of what news is due out that can, or usually does affect your markets. This point was highlighted for us in my blog post [here] which discussed lessons traders could take away from the recent “Brexit” result in the UK.
Does your market move in tandem with (or in the opposite direction to) another market? E.g. The canadian dollar tends to move in sync with oil prices.
What are my market’s other general characteristics? e.g. Does the market gap often? How volatile is it? Is it a seasonal market?
Now that your homework is done on your opponent it’s time to review your past games (trades). No sports team would, or should, let an opportunity to review their performance go by. Let’s review our game tapes, and see who our MVPs were.
What did you do well? What did you do poorly? Did you follow your trading strategy and money management rules or did you take a trade because you were bored or impatient? What do your best trades look like? What do your worst trades look like? Our review will reveal these answers.
Now this next part might be a little controversial. Most people would argue that you review your trades to look at your trades, usually your worst ones, to identify and correct mistakes like letting a loss get out of control. I do agree with that this type of review does have its merits and should be done but as a trader I am much more interested in my winning trades than my losers. After all, that’s where I make my money!
In my trading world, a review looks at my best trades first to try replicate them and only then do I work on errors in my trades.
Firstly you will need to identify your best trades. If you have good trading records that can be easily manipulated in a program like excel and detail each trade, identifying your best trades should be a fairly simple process. What we need to do is identify which trades gave us the biggest profits per risk. If each of your trades risks the same amount then this is easy. Just organise your trades by largest profits to smallest profits. If not, then you need to adjust your profits to show the profit for an equal amount of risk.
Now that we have an organised record of your trading results we want to look at your top 20% most profitable trades. Open up the corresponding charts. What do they have in common? Was price moving in similar way each time? Is volume at a certain level prior to your entry? If you use any other technical indicators or oscillators like moving averages or the Relative Strength Indicator take careful note on how they behave on your big winners.
Look at your winners. Study them. Memorise how they look. The idea here is to identify which of your setups have the best chance of making you some serious dollars.
Once you know what your best winners look like it’s time to face your worst trades. This can be a lot harder from some traders. They have to look back at their losses, see their mistakes and see what it cost them.
I recently looked at my own early trading results. Stupid mistakes, like letting a few losses run and get bigger than they should have, cost my account dearly. Fixing these sorts of mistakes is saving my trading account thousands of dollars each month.
So once again we are looking at 20% of our trading results, the bottom 20%. Look down at the bottom of the list, at those negative profits. Don’t worry if this brings you down, that’s what we are here to fix!
Slightly different process this time. Yes, look at your trades and look at price, volume, indicators et cetera for common patterns. The story doesn’t stop here though, in addition to finding patterns which might indicate a higher likelihood of a bad trade you need to analyse each trade against your trading strategy and money management rules.
Did you follow your strategy when entering and exiting each trade? Did you enter/exit the trade early, late or exactly per your rules?
How big was your trade? If you normally risk $100 per trade did any of those trades exceed your $100 limit? Why? Did you miscalculate your initial stop order or did you move it because you hoped the trade would turn in your favour?
