8 Ways To Improve Your Trading in 2012

Eight Things You Can Do In 2012 To Improve Your Trading

  1. Review your records and lessons from then
  2. Set goals for 2012
  3. Read a book by a trader
  4. Read a book about trading
  5. Understand how process works
  6. (Re)Define your trading system
  7. Learn how to de-stress
  8. Learn how to get in the zone whenever you want



As 2011 draws to a close, people naturally begin to take stock of the past year and think about their plans for next year. For most people, this means celebrating New Year’s Eve with friends and family and setting some resolutions. Traders are no different—the end of the year is a natural point to evaluate how we have been doing and to set some goals for next year. Most traders measure annual returns, which are the most obvious and most important benchmark.  This article will offer eight ideas for how to review the past year and hit the ground running in 2012.


  1. 1.       Review your records and lessons from then


There’s a famous saying: “The numbers don’t lie”. The end of the year is the perfect chance to review what the numbers are telling you. The first goal is to review your P&L. Is  it positive, flat, or negative? How does it compare to previous years? Are you happy with it? Given that people trade in order to make a profit, this is the first and paramount consideration.  It is easy enough to hide your statements and pretend that you’re making money, but looking at your records forces you to own up to the reality of your results and profitability. Alexander Elder says in his book Trading for A Living that you can tell the quality of a trader by the quality of his records.

There is more utility to this, actually. By looking at your records for a few years, you will be able to draw out more than just profitability. You can see how you do under different market conditions. For instance, if you trade stocks and do incredibly well in bull markets but poorly in sideways and bear markets, then you may need to figure out ways to take less risk in poor markets. For instance, you could add indicators that help you determine market conditions; when those indicators suggest a weak market, then you could reduce your trading size or not trade at all. That would help you to reduce what you give back in weak markets. Or you are comfortable with the downside swings but want to take more risk in order to maximize the upside—then you could look at certain indicators to see if they suggest a bull market, and then take more risk.

One other example is if you look back and find that your results are repeatedly poor in certain times of the year, beyond what any seasonal patterns would suggest. Then you could examine your history and determine what the source of that was. For instance, lots of people spend more time out partying in the run-up to Christmas—maybe that partying is causing you to forgo your normal preparation or to trade when you’re not 100%? Or it could be that if you trade from home, and your kids are home during the summer holiday period, that it having an impact on your concentration? In which case, you could implement a routine or perhaps a new physical locale within your home to mitigate that.

Resolution #1: Review your records. If you don’t have records, start keeping them now.


  1. 2.       Set goals for 2012

As a rule of thumb, you have to know what you want to do in order to accomplish it. You don’t  go for a walk and end up climbing Mount Everest. It’s difficult to get to work if you don’t where the office is.

Trading is no different. Without setting goals related to your trading, you probably won’t reach them. Do yourself a favor and come up with basic goals for 2012. How much do you want to make? What’s the largest drawdown that you want to tolerate? If you are a professional, how much money do you want to be running at the end of the year?

Much like reviewing one’s records, there is more to setting goals than just P&L. The real value comes in setting goals related to *how* you trade.  In his book Hedge Fund Masters, the famous trading psychologist Ari Kiev recommends setting goals and working back from them to figure out what you need to do to accomplish those. A basic example would be that if you want to make 25% more than you did last year, you should set that number as a profitability goal—and the most obvious example is to increase position size by 25%, in order to make that possible.

Let’s say that you have reviewed your records and determine that your win rate isn’t high, less than 50%, but that your winners make 2 or 3 times the amount that you lose on a losing position. The logical answer – to boost your win rate and/or to make larger profits on your winners. In that case, you will want to do more work on all of your positions, in terms of both breadth and depth, to feel more comfortable taking bigger positions in your winners.  Thus, your goals would be to increase by 50% the amount of research you on every single position and also to make between 3 to 4 times as much on your winners as you lose on your losers. While that is not a profitability goal in and of itself, that could have a huge positive impact on your P&L.

Resolution #2: Set profitability- and process-based goals.


  1. 3.       Read a book by a trader

Issac Newton famously said, “If I have seen further, it is because I have stood on the shoulders of giants”. When trading, one of the best ways to improve your own performance is to learn from the great traders—either what they have written themselves or from interviews. It gives you a window into how they think about markets, about risk, how they evolved over their careers and became stars. This knowledge is readily and cheaply available in books, so take advantage of it.

Market Wizards by Jack Schwager is one example of what I have in mind. Comprised of interviews with famous traders, you get an idea of what individual traders do that is unique and what is common to all of them. For instance, all of them emphasize the importance of cutting losers. All of them will talk about having a methodology that suits the trader. The nuts and bolts of that methodology will be quite different for every trader—some trade fully computerized systems while others are purely discretionary.  Every trader can find something relevant to their own situation.

Another all-time classic  is Reminisces of A Stock Operator. It contains wonderful lessons that are applicable to every trader—such as the importance of doing your own thing, of evolving a system that works for you. One precious thing about the book is that we follow Livingston’s psychological travails, as he makes great money in some markets and goes bankrupt in others; as he learns first how to beat the game and then game at the mainstream brokers; as he struggles to preserve wealth and even has to be forced to keep money in a safe for his family. Reading about these prepare us for our own struggles and offers an in-depth portrait of what all traders will face to varying degrees.

Resolution #3: Find a good book by a trader and read it.


  1. 4.       Read a book about trading

This is slightly different from the previous, as I mean books that are more about some technical aspect of trading. One example would be Van K Tharp’s works, which concern the more theoretical aspects of trading  psychology or trading systems.  Another would be One Good Trade by Mike Bellafiore, which covers how a prop trading firm trains its traders in their system.  Books like these offer a different perspective from by traders because they are considering aspects like trading psychology, risk management or how to build a good system.

The real value in these books is that it gets you to consider an aspect of trading, in isolation, that you wouldn’t have before. For instance, by focusing just on trading psychology, you can improve your psychological preparation for trading and also your reaction to the markets by implementing some of the suggestions offered in a book about trading psychology. By reading a book like One Good Trade, maybe you would take away the book’s emphasis on trading well– defined as sticking to their system and always focusing on making the next best decision in the markets.

Some books that aren’t entirely about trading may also be relevant. Works like Beat the Dealer or The Theory of Poker offer lessons in betting strategy in games of risk, with lessons that are easily portable to trading. Understanding games like poker and blackjack may actually be the best training for trading—your goal is always to make the best decision given the probabilities and well-informed/well-researched subjective judgments, make your bet, and then to accept whatever the next card is. No matter what card ends up falling after you have taken your decision, your goal is always to make the highest expectancy bet, given the available information. Repeat this process many, many  times and you will end up a winner.  For most traders who may be struggling, this is a key insight on the road to profitability and success.


  1. 5.       Understand how process works

One repeated theme in this blog entry has been the importance of process. Trading is really the taking of market decision, such as what to buy and sell, with the goal of making a profit. As with the poker comparison, the key is to get correct the individual decision and the process of making decisions—knowing that if you do, then the profits will take care of themselves.

Most traders rebel slightly at this notion, either because they think that there is something different about trading, or because they think that such a mechanistic view removes the human element, including things like intuition.

I understand that objection but would respond with a couple of points. The first is that trading necessarily involves taking financial decisions that involve risk. As such, you have to evaluate the potential risks involved and measure it against the potential upside, in order to decide if it’s worth the risk. This, necessarily, involves a financial decision. How do you determine the risk/reward- by sticking a finger in the wind or through a well-reasoned approach? Probably the latter. And if you have an approach, then take a closer look at it and try to understand what it is, if it works, how it suits your personality, and how to make that decision-making better. By comparing to historical scenarios that were similar or to previous trades, you can hopefully find a way to make better decisions in the future.

There is one other thing to consider. Most traders really struggle with controlling their emotions while trading. Most of the trouble comes when they start thinking about the money involved—either scared because of losses and panicking or becoming overconfident and overexuberant and thinking about the river of riches that is about to come their way.

The way to beat this is by  emphasizing the process for making decisions and making it more robust and explicit. Then you play the game of “making better decisions”, which has less emotional content than the P& figures themselves., It also gives the trader more chances to think about his actions in advance and to have plan, because it’s been made explicit. By sticking to a process that’s almost mechanical, like a checklist, that removes a lot of the emotional highs and lows from trading.  Too often, the fear that traders feel is because they don’t know what to do under those market conditions. By having a plan or a checklist ready in advance, it makes it straightforward to take the right decision, whatever the market is doing. Knowing what to do will go a long way to removing stress!

Resolution 5#: Develop an understanding of how a trading process should work.


  1. 6.       (Re)Define Your Trading System

As covered in the previous point, the key to taking your trading up a notch is by understanding process. The first element is to understand process at an abstract level—how having a series of rules and guidelines can lead you to take more systematic, emotion-free and disciplined trades.

The next  step is understanding what your own process should be for getting into trades, getting out of them and managing risk. In short, it’s a business strategy.

How do you define your trading system?  The best way is to make up a little document that presents just the basics.

  1. 1.       Which market or markets you are trading
  2. What your objectives are—there is a world of difference between trying to beat the S&P 500 by 2% a year and trying to make 12% annualized with no drawdowns
  3. How you get into trades—it could be a description of a few typical setups, or a list of minimum guidelines.
  4. How you size trades that you get into—is every trade the same USD value? Do you trade different sizes depending on volatility of the position? Does your position vary along with your measurement of conviction?
  5. How you manage ongoing positions—How do you keep track of ongoing positions? Do you ever add to then? What are you looking for??
  6. How do you exit—Where do you set stop losses and take profits? What else would cause you to get out—for instance, if your investment thesis was proven partially wrong or if the position hadn’t performed after a certain period of time?
  7.  Overall portfolio risk—Do you have an overall risk overlay for the portfolio? What is it based on? Do you ever go to zero exposure if you suffer losses?

That is the broadest of outlines and I’m sure that there is a lot that I missed. The point is this—the more you can think about your own approach to trading in a systematized fashion, the more you trade in a way that’s governed by rules that you set, then the more likely it is that you’ll be on the road to your objectives.

There are several books that present the author’s trading system very well and cover all of the points listed above. There are plenty of books that cover some aspects of these, but the two best overall are How to Make Money in Stocks by William J O’Neill and Winning on Wall Street by Martin Zweig.


Resolution #6: Define your trading system for yourself.


7: Learn how to de-stress

                One of the most difficult aspects to trading is the stress. Risking money is bound to have an emotional impact—doubly if the markets are difficult or if you are in the midst of a bad run. Moreover, just like with most fields, stress negatively impacts our ability to make decisions and to function—which is just what you don’t want to hear when you’re trying to stay on an even keel.  Thus, stress management emerges as a necessary and vital aspect of trading.

How does a trader keep stress under control? The most direct way is actually through one’s trading itself. Most stress comes not from the money at risk, but more from not knowing what to do in the moment. If you haven’t prepared a plan, then changing markets can present difficult, stressful conditions under which to make decisions on the fly. It reminds me of the saying, “Failing to plan is planning to fail”. Thus, one of the best ways to keep calm during the trading day is to have decided on a potential course of actions in advance, preferably when the markets are closed.

There are other ways to reduce stress that are not trading-specific but are very relevant for traders. Meditation and yoga are two of the most popular. Famous traders like Bill Gross are known for taking time out of their day to meditate.  The health and relaxation benefits of meditation and yoga are well-known—for instance, by helping people to relax, to focus better, etc.  The benefits spill over into all areas, but will obviously help to raise one’s game in trading. Thus, establishing a program of meditation will certainly help to reduce stress levels.

Another way is just to find time away from the screen. There is always the temptation when markets are difficult or we are running bad to stay in front of the screen and try to work harder and harder. While hard work is obviously critical for being a successful trader, there is a point at which it becomes counter-productive to keep slaving away at the screen. Unfortunately, that is likely to keep reminding you of your results and making you feel bad. The best course of action is to break this association.

The best way is to schedule in some time, for instance a Saturday, to clear your head and to purposefully divert your focus away from  trading. Spend time with your family, your friends or engaged in your favorite hobby. Turn off your blackberry/smartphone and spend time engaged in something completely unrelated to the markets. Remind yourself that there is a life outside of trading. It’s easy to get too occupied or obsessed with trading and to forget to do this, but by making it a critical aspect of your trading plan, you will be boosting your overall performance. Our bodies need sleep and our minds need purposeful relaxation and distraction.


Resolution #7: Dedicate time for relaxation, doing something not trading-related.


8: Learn to get in the zone whenever you want

               As we explored with the previous resolution, relaxation is a necessary element of being the best trader that we can be. While scheduled relaxation and distraction from markets is a key part, there can also arise several moments during the day when we want to calm down or to get back in the zone after being distracted. Luckily, there are techniques for getting calm, collected and back in the zone whenever we want. In fact, this works for pretty any much state we want to access, but for traders it’s most important to be calm and focused during the trading day.

This technique is called anchoring. There are 6 steps:

  1. Get calm and relaxed—for instance, in an armchair when there’s no one around. Take a few deep breaths and just let it all go. Get clear of any thoughts or feelings.
  2. Think of a time when you were really focused. Drift back to the time and concentrate on what you saw, felt and heard at that time. For instance, you may hear a certain kind of music that helps you to concentrate; you may feel a wave of relaxation emanating from a certain place; you may see a picture that you associate with focusing, like one of a Zen master meditating. Whatever the images, sounds, and feelings are, try to re-experience them all. If you cannot recall such a moment, then imagine in your mind what you would do, feel, see, hear etc if you were in a state of ideal focus.
  3. Make some kind of signal for accessing the state. It can be physical, like making a fist; or it could be a sound, for instance, saying the words “I’m In The Zone”. Practice the signal a few times so that your brain associates the signal with the desired state.
  4.  Clear your state- move out of the focused state and into a void state for a few seconds. Breathe out, crack your knuckles really hard, whatever does it for you.
  5. Activate the signal. If you fully experience the state of focus again, then the signal is set up. If not, then repeat steps 1-4 until it works.
  6. Be prepared to use the signal whenever you feel it’s appropriate. For instance, if you get distracted by something unexpected, activate your focus signal and you should be back in the zone in no time.

This process can be used for any other state that you desire, such as relaxation; motivation, etc. Thus, you should set up not only for focus, to keep you playing at the top of your game all the time, but also for achieving a relaxed state. This may be helpful for when the trading day finishes, to help you wind down, or to keep you calm as you are looking to initiate a trade or put on an order.

Resolution #8: Learn to access helpful states whenever you want


There you have them—eight steps that can have a huge impact on your trading in 2012. What other things do you think are important for improving your trading in the new year?

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