It is time for a semi-annual review of your trading. People who are at the top of their field have one thing in common -- they constantly are looking to improve. They never are satisfied with their performance and believe they always can learn something new.
Striving to improve is particularly important for traders. This is a job that always is evolving in various ways. The market may repeat certain patterns, but it never quite the same.
If we want to improve we need to review our trading regularly and look for things we can do differently to produce better results. Even if you have had great success it is important to recognize that market conditions change rapidly and it may require adaptation if we want to continue to produce superior results.
A very easy trap to fall into is to act automatically rather than think about what we are doing and why. In the age of computer algorithms that can be particularly dangerous as the programs exploit market players who are too predictable.
We are fast approach the halfway mark of 2017 and it's a good time to look back at our results and reflect on what worked, what didn't and what we might change. This isn't just about returns. It is about the process and the way you deal with the market on a regular basis. Just because we made money doesn't mean that we performed in the most effective manner.
These are my thoughts on my trading in the first half of the year. I present this as an example. I want to study my actual trades in some detail and not just rely on my memory, as the task here is to be as objective as possible.
In general, I am pleased with my stock picking and market timing during the first half of the year. The numbers always can be better, especially if you use the Nasdaq 100 (QQQ) as a benchmark.
My biggest shortcoming was that I was underinvested far too often. I didn't work my capital hard enough. There are two main reasons for this: I was too selective with my stock picking and wasn't patient enough with many of my trades. I had some great picks but either traded them too small or didn't give them enough room to play out. If I had put more emphasis on those trades my returns would have been substantially higher.
In an environment with normal volatility, underinvestment would not be that much of a problem. New opportunities come along far more often when there is more movement, especially to the downside. However, if you sell a winner in the current environment there aren't as many opportunities to reinvest in something else.
The solution is to be less selective with stock picks. Maybe buy things that I don't like as much and give them more time to work. That could be helpful, but it requires very rigid discipline should a trade not work. Too often when you make mediocre trades you end up with a series of small losses, which is particularly easy in this environment because of low-volume randomness. However, there must be a clear line in the sand and strict discipline to ensure that significant losses are not incurred.
I've often thought about conducting an experiment where I pick stocks randomly but manage them with a very carefully designed set of rules. Would there be a benefit to simply staying almost fully invested much of the time even if my conviction level was low in some of the stocks?
I often find my picks do much better than I think they will, but the likely answer is that it will depend on the overall market trend. Staying fully invested in a market trending upward will offset sub-optimal stock picking, but when there is a turn to the downside the losses can be very big, very fast. It is easy to give up weeks of gains in a couple days if you are caught in a turn.
The main thing I need to work on is having confidence in my stock picks and not closing them out unless I have a clear reason. General fears about the overall market are not a good reason to give up on a stock that is still healthy technically.
When you reflect on your trading in the first half of the year, what do you think held you back? What would you change in the months ahead in order to produce better returns? Do you need better stock picking, stronger discipline, a change in style or something else?
Think about it now and develop a plan to put into action next week.
