It’s really easy to get sucked into overemphasizing the outcome of a single trade, probably one of the worst habits we all must overcome.
Provided we’re sizing trades smartly and managing risk, our success as traders doesn’t lie in any one individual trade but in the system over time.
How to focus on the process?
1. Define your strategy and codify your process
2. Create a trade log to track the performance of the system
3. Backtest the strategy to rough out the ideas (remember, do not rely too heavily on backtests, overfitting is really easy and the future will look different).
4. We can forward test for an out of sample look of performance
5. Once we have a strategy we’re comfortable with, we move to papertrading and live testing with smaller capital.
6. Then we scale, making sure we track the entire way.
This approach is exactly what transformed my trading from haphazard to consistent and how I’ve maintained my performance for nearly 2 decades now. It’s nothing revolutionary or sexy but something I wish I understood better when I first started out as a teenager. Happy to dive into anything you want to explore more in depth!
Posted by esInvests
1 Comment
>It’s really easy to get sucked into overemphasizing the outcome of a single trade, probably one of the worst habits we all must overcome.
Amen to this, great post and very important topic.
Though it’s broadly about decision-making rather than options, I found Annie Duke’s book *Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts* one of the best at explaining the somewhat counterintuitive concept that the outcomes aren’t as important as how the decision was arrived at (she uses the poker players’ term *resulting*). In short, she explains that in systems with lots of randomness it’s very natural for us to assume an overly tight relationship between results and decision quality because our brains are wired to seek out certainty from evolution.
I struggled badly with emotions when I started, and fell into the very human trap of blaming failures on randomness but crediting successes to my skill. Once the impact of randomness on both good and bad outcomes really sank in (also thank you to Nassim Nicholas Taleb) it eliminated a lot of emotion from my trading and helps keep me focused on refining my trade selection and execution rather than the mania/agita that comes from wins or losses.