As traders, we spend more time making decisions than we do trading! Though it’s natural to take decision-making for granted, problem-solving and decision-making are processes that we can optimize. Why is it that only a few traders invest significant amounts of time learning how to increase their skills in this area?
Having worked with traders in varying capacities for over 20 years, I believe trading methodologies are not a problem. Furthermore, I believe it’s the decisions we make or don’t make when employing our methodologies that’s the cause of most problems. Why? Because make decisions at every stage of your methodology:
evaluating a potential entry,
determining where and how to enter,
calculating how much to risk,
assessing when and where to move your stop,
determining when and where to scale-in if,
determining when and where to scale-out if,
assessing when and where to exit, and
when to adhere to your plans or not, to name a few.
And, looking even more contextual, let’s look at some of the decisions we make regarding our overall trading process using Kiplinger’s quote to define six primary categories:
“I had six honest serving men who taught me all I knew—their names were where and what and when, and why and how and who.” —Rudyard Kipling
Who to interact with. Who to learn from, who to trade with, who to use as an ISP, who to listen to or not listen to, who to pay to maintain your equipment, who to contact regarding an order issue, etc.
What to do. What market or markets to trade, what methodology to follow, what courses to take, what to learn and/or study, what software to use, what data feed is best to use, etc.
When to do it. When to trade, when to start trading , when to enter a trade, when to move a stop, when to exit a trade, when to adjust a trade, when to practice trading, etc.
Where to do it. Where to enter the stop, where to place a stop, where to trail a stop, where to place reference levels, where support is, where resistance is, where value is, etc.
Why to trade. Why trade or not trade, why enter, why trade a certain market, why listen to CNBC, why use the Market Profile, why use technical analysis, why go to conferences, why join a study group, etc.
How much to risk per trade. How much energy, time and money to put into learning to trade, how much time to devote to practice, how to journal, how to calculate probabilities, how to use different software, how to judiciously use margin, etc.
On a scale of 1-100, how would you rate yourself or your ability to make high-probability, informed decisions—decisions that have the potential to give increased odds of getting what you want? If you didn’t rate yourself a 100, answer this: what would a minimal 10% improvement in your self-assigned score mean to you?
Based on our client’s experiences, we know that a 10% improvement can have a profound impact. The question then becomes, “How can we get better at decision making?”
One way to do this involves two steps:
Clarifying and acting congruently with your core principles, i.e., your trading culture.
Creating and refining a framework that supports you in aligning your performance with your principles.
When those two elements are in place, your ability to make high-probability decisions increases exponentially which can result in you:
Being more proactive than reactive.
Knowing why you do what you do.
Interacting with others as a leader.
Doing by choice the what, when, where and how.
Your principles dictate your framework for making decisions. Let’s phrase it as an equation:
Your Principles + Your Structure = Your Decision Making Process
Let’s look at each of these elements in more detail, starting with principles.
“Culture drives great results.” -Jack Welch
I recently had a conversation with a buyer at Costco. This person brought to light a lot of the company’s strengths, which include:
The quality standards they demand from suppliers far exceed what most retailers demand.
The testing procedures and standards they adhere to at their own labs.
Their policy of accepting returns and passing the cost of the return the supplier instead of the consumer.
Clearly, these decisions about how to interact with and supply product to consumers stem from their corporate values.
The Four Seasons Hotels provide another stellar example with their slogan, ‘We are ladies and gentlemen serving ladies and gentlemen.’ Lest we assume that this is just a clever slogan, let’s take a look at just a few of the awards they have won recently:
Listed in People Magazine’s 100 Best Companies to Work For. Eighteen consecutive years.
AAA Five Diamond ranking: 22 Four Seasons locations won.
Forbes Travel Guide, Five-Star Awards: 20 Four Seasons locations received a 5-star rating.
Condé Nast Traveler Gold List: 4 locations listed.
Southwest Airlines, who boasts 40 straight years of profits in an industry known for bankruptcy, has a consumer-oriented culture. They place a strong focus on customers, employees and suppliers. While it is impossible to keep all three happy all the time, they not stop trying to do so.
Zappos CEO Tony Hsieh once said, ‘I’ve been asked a number of times what the company’s biggest asset is, and my answer is always the same: our culture because we are a service company that happens to sell shoes… in order for us to succeed as a service company, we need to create, maintain and grow a culture where employees want to play a part in providing great service.’
In 2000, Zappos had sales of $1.6 million. By 2009, their sales were over one billion. In 2009, Amazon bought Zappos for $928-million with all of the Zappos management team agreeing to stay.
The bottom line is this: if you believe decision-making is a significant factor in your trading and that your principles are a key factor in your decision making process, I believe you have no option but to refine and clarify your principles. This will lead to improved decision-making ability.
Suggestion: Learn more about how principles impact the decision-making process in the Trading Culture section of ExceptionalTrader’s Resources.
And, in the meantime, think about the last five or six decisions you made regarding your trading process and how your core principles influenced those decision and their ultimate outcome.
Until next time . . .