The Unresolution

It’s the new year—time for a new year’s resolution, right? We’ve all been there—whether it’s losing weight, spending more time with family, or just trying to get more done every day. We’ve all made New Year’s resolutions to target something important in our lives.

Likewise, we’ve all probably experienced a failure to achieve our New Year’s resolutions. According to an authoritative study of New Year’s resolutions, This Year I Will, only 8% of people actually succeed in keeping their resolutions. 8%! Sometimes, it seems like you have better luck playing the lottery.

As traders, we start with a blank slate every January 1st. It’s natural to have targets in mind for our P&L—that’s how we measure ourselves. We can also help ourselves along the way by setting goals for all kinds of metrics, like our win rate and average gain per winner. These are all components of our success and deserve to be measured. But the key question is—are they worth setting resolutions for?  After all, they’re probably doomed to failure, like 92% of all resolutions.

There are various schools of thought on how to improve your chances of keeping New Year’s Resolutions: some, like blogger Ramit Sethi, suggest creating systems to make them more likely to succeed; others, such as the book This Year I Will, suggest making them specific and measureable. While these are useful things to keep in mind for goal-setting, it’s something that has been covered numerous times in all kinds of places. Heck, I’ve even written about a couple times, including a piece last year about New Year’s Resolutions. I am going to take a different tack here. Rather than rehash the same advice, I will offer up something entirely different.

I have a new proposal: the unresolution. Don’t make any trading-related resolutions at all. None.

 

What to Do Instead

I can hear you already. “Whaaaaat?”. “That’s crazy!”.

Hear me out. There is a method to my madness.

Instead of looking forward, we’re going to look backward. Rather than setting goals, we’re going to evaluate where we are and where we’ve gone. We’re going to do a deep dive into our records.

The purpose of this is deceptively simple. We are trying to establish where we are in our trading—how much money we are making, where and how are we making money, what’s costing us or dragging down our performance. By tracking our past and present—and hopefully future—we are forced to look at our results, in granular detail. When we actually examine our results, we can learn a great deal about ourselves and our performance—including our weak spots.

By examining our results, we will learn how we’re really doing. As a result, the necessary changes will leap out at us. Do you always lose money trading a certain product? Then you’ll be forced to confront the truth and stop it. Do you always make money in a certain setup? You’ll find that out — and probably trade it with bigger size in the future.

How Do You This?

The first step is to make sure that you have records. Obviously, if you don’t have records, then you need to pull them together. Get all of your brokerage and account statements together and put them into one integrated file where you keep track of as much detail as possible about your previous trades. It includes the obvious things like buy/sell, price, date, etc. but it could also include more detail.

For instance, if you’re trading a stock, get the info on a company’s sector and industry. If you trade stocks across different countries, keep track of the country and also of FX movements—after all, you want to know if you’re making money from your stock picks, currency moves, or both.  If you are an intraday trader, keep track of the exact time of every order—are you at your best in the morning, afternoon or close? What kind of setup was it when you got in to trade—keep track of the conditions when you got into the trade.

Once you have as much data as possible, then you can start to build analytics for yourself. The basic ones are: win rate (percentage of your trades that are winners vs scratches or losers); average winner size; average loser size; ratio of average winner to average loser. You should have all of those, as they’re basic yet critical to evaluating your trading.

But go one step one further—look at your metrics for all kinds of scenarios. If you’re trading multiple sectors or countries in the stock market, what is your P&L by sector or by country? What is your track record trading one product versus another? How do your metrics look if you evaluate them quarterly?

What are your metrics by trade setup? You might be surprised to know that only a couple setups are making all of your profits, or that one is actually losing you money. Indeed, that is the core message of Mike Bellafiore’s The Playbook, where he advocates building up a repertoire of proven trading setups and then focusing on implementing those.

The key here is to keep the most extensive and thorough records possible. These give you the information necessary to evaluate your trading performance in as many ways as possible, and to calculate all kinds of relevant metrics and analytics. If you do have the info already at your fingertips, great. If not, then start to keep track of everything in real-time. The better your records, the more raw data you are giving yourself for evaluating your performance. As Dr Alexander Elder states, “the quality of record keeping was the single most important factor in a trader’s success or failure”. While I don’t necessarily agree with this, statements like this by trading gurus hint at the power involved in keeping good records.

Once you’ve done that necessary work, a few things should happen. The first is that you’ll know how you’re really doing—with all of the pluses and minuses of that knowledge. You’ll be able to be brutally honest with yourself. You’ll be able to slice and dice your trading records to know how you’re doing in all kinds of situations and according to many metrics. You’ll have all of the data that you need to draw the right trading conclusions.

The second is that after you’ve analyzed the data, then the right thing to do should become obvious. Lose money 80% on a certain setup? Stop trading it. Are your winners only 1.5x bigger than your winners? Then either let your winners run more or cut your losers sooner. Always make money trading forex? Then trade it in bigger size. Just the mere act of being honest with yourself will lead to thorough examination and to certain obvious conclusions.

The third is that your trading will get better in the future. The more that you track for your records, then the more that you have to think about your trading. This kills two birds with one stone. The first is that makes it easier to systematize what you’re doing—you’re using hard numbers and criteria to define trade entry, rather than a more touchy-feely “this looks good”. Before you would look at a chart and say “this looks good”, now you have many more parameters that you put around it, like specific price levels or technical readings. You are tightening up your process and turning it into more of a checklist.

This also prevents impulsive trading. By actually keeping track of what’s going on, you are forced to examine it in real-time—and by examining it, you are thinking about it, rather than just acting. If you are reflecting, then your trading is going to be more thought out, with less emotional and less “shooting from the hip”.  Your P&L will thank you later.

One unexpected growth in your trading—as you get used to tracking metrics and keeping better records, you will become more comfortable with it. Afterwards, you may even find yourself coming up with yet more metrics and data that you want to keep track of, leading you off in new directions. You’ll become more intellectually curious and have new ways of looking at the markets and your own performance.

Keeping better records also dovetails nicely with efforts to boost your mental game. Sometimes, you’ll be in a performance slump and not able to explain why – or how to get out of it. You could examine your records and find that you’ve been executing the same setups as usual, but you’ve just seen a lower percentage work out than normal. Nothing to be alarmed about. Or you could find that the recent slump correlated exactly with when your new baby came home from the hospital and your sleep became erratic. Solution? Buy some earplugs and get more shuteye.

My Story

In sharing this idea of the unresolution, I can offer my own experience with it. For most of my career, I have been an expert in Russian equities and have worked in various hedge funds focused on the space since 2005. At the start of 2013, I wanted to learn more about other markets so I started a paper portfolio of Russian, Turkish and South African equities. I wanted just to get my feet wet and to learn the two new markets, so obviously I had no concrete P&L goals. It was more about education than intending to make money. Remember, when starting something new, don’t risk a lot – in this case, nothing. It’s better to lose paper money than real money.

After a few months, I was examining my records and found that more than 100% of my profits had come from…Russian securities! That’s right, the other two markets were net losers for me. While it shouldn’t have come as a surprise, it did make a few things painfully obvious to me. The first is that my position size for Turkish and South African stock should have been, and would become, much smaller than for Russian securities.

The second point was obviously to review what went wrong with the trades that I had put on to see what was working and what was not. After some homework, I concluded that the core investment ideas were well thought-out and properly researched, but that my timing was haphazard—whereas with the Russian securities, my timing was much more thought out. As a result, I devised a few new ways to track news. While it’s too early to evaluate the impact on my paper P&L from these changes, I am at least much more conscientious in my preparation.

While I hadn’t set out any concrete P&L goals to shoot for in 2013, I just dove in. But what helped me to make impactful changes was the very act of reviewing my records that prompted me into some natural – and necessary– course corrections. When thinking about the new year, I naturally thought about just continuing this approach.

Rather than experiencing the disappointment and frustration of a(nother) failed New Year’s resolution,  let’s make an effort to upgrade how we keep track of and review our trading. If you’re doing it right, then the answers and necessary course corrections should arise naturally.

Will you join me this year in making an unresolution?

 

By Bruce Bower | E-mail: Bruce [at] howoftrading.com

Blog: www.howoftrading.com | Twitter: @HowOfTrading

Leave a Reply

Sign up for our newsletter