Thursday, 5 April 2012

5 Key Trading Factors

Things are going pretty well right now, so I thought I'd write today about the key factors with my trading that have improved my profitability this year. The 5 most influential are as follows:

1. Value. Yeah I know, I'm banging on about value again but whether you want to hear it or not, the fact is, my trading started to improve exponentially as soon as I introduced value. I used to trade by watching the match and attempting to guess what would happen next on the court. That is an extremely difficult thing to do because sport is very unpredictable. Trying to guess what will happen in a match is a pure gamble but the beauty of trading is that to make money on sports, we don't NEED to predict accurately what will happen. You CAN predict far more accurately what will happen next in the market. As long as you have an idea of what is likely to happen, then you have a chance of being able to spot when the patterns in the market are out of line with the norm and that's where you find value. Of course, being able to read a match to some degree is still a skill and will still help you but without taking value into account as well, you are going to eventually get caught out by the laws of probability and variance. Good trading is not about picking winners or guessing correctly what will happen during a match; it's about taking good prices. I saw a comment from someone recently stating that they were 'Fed up of people going on about value' and that trading is about 'making money, nothing else'. Yes and in the long run, the way you make money IS by taking value! Some people don't want to acknowledge the importance of value because they either don't understand it or they are worried that if value is important, then what they've been doing for so long is wrong and will not produce results long term. Value is not just a vague concept, value is your edge and knowing that was probably the biggest leap I made towards improvement last year.

2. Mindset. Strange how probably the most important aspect in trading is usually the most over-looked, certainly by the vast majority of new traders. If you don't understand trading psychology, you will never crack trading but even if you do understand it, that's often not enough. You need to work at it. Getting the correct mindset is a skill, more so than being able to read the market or have in-depth knowledge of the sport. I knew all this for ages but only in the last 6 months did I do some serious study and work based just on this aspect. I always thought it would just naturally happen eventually, that one day I would wake up et voila! - I had the perfect, steely, unflappable, emotionless mind required for trading and it would never falter again. I was wrong. Trading doesn't work like that - the human mind doesn't work like that! I'll be writing more on this subject very soon.

3. Low stakes. I've mentioned before that my stakes are 5 times lower now, than they were a year ago, yet my profit is higher. Why? Because low stakes = lower anxiety. If you have any sort of pressure weighing down your mind, it will affect your trading - full stop. My stakes have gradually gotten lower and lower every few months over the past year and I don't intend on upping them for a good while yet. I've made that mistake too many times; over-confidence + under-testing = over-staking. With less at risk, I've had more freedom to experiment and learn at my own pace and this has enabled me to fine tune my strategy without the need for paper-trading (which never gives an accurate representation of real trading anyway).

4. Suitable strategy. I've written many times that I switched 6 months ago to a strategy that I felt was more suited to my personality. I now have something that not only is more profitable but is more enjoyable. And that is the key; you are unlikely to make money if you find trading boring or a chore. Maybe in the short-term you can push past that fact but in the long-run, I don't see how you can remain focused, day in, day out, if you don't like what you are doing.

5. Records. When we first hear about how keeping notes of all our trades is vital, I'm certain that most of us think 'Sounds like too much hard work'. Well, it is extra work and it's not exactly fun but I don't know anyone who is successful who doesn't keep records of each and every trade. I'm not talking about a P&L spreadsheet of numbers, I mean written notes about what you did, how you did it and your thoughts on how everything went, including your mental state. Every single time I've stopped taking notes for a period of time (either through boredom or complacency) I've regretted it. This is because I've had to back-track through P&L sheets without notes on them and try and remember what I did, in order to work out where I'd been going wrong. I've even thrown notes in the bin, (either through anger and wanting to purge myself of all evidence or through arrogance that I wouldn't need them) and then been gutted weeks later when I needed to see details of past trades. These details have each and every time, provided answers to where I was going wrong or indeed, going right. Sometimes when we trade, we don't see the patterns of behaviour we exhibit every day because we are so focused on the end product - how much did we win or lose. Without notes, we don't get to see those patterns and I have often been shocked at how much I've been repeating the same mistakes without even realising. Notes are the key factor in rectifying issues and improving my trading and I now realise I need to do them EVERY DAY.

My improved results have not just happened over-night. They are a culmination of 6 months of hard graft, where I turned my whole way of trading upside-down and began the slow process of rebuilding a shattered bank and confidence. It's possible that they are just short-term and that variance is yet to really kick-in but I very much doubt that it is a run of pure luck. Only time will tell though.

My next post will be expanding upon what I feel is the most important of all these factors - mindset.

OFF-COURT BEAUTY World number 98, Urszula Radwanska of Poland:


5 comments:

  1. Great post, only the second ever to qualify for my Top 5 trading posts. What an honour for you Sultan.

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  2. Why thank you sir, much appreciated!

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  3. Interesting reading Sultan. I'll refrain from pointing out that you had officially retired from the value debate and focus instead on your comments about mindset and record keeping.

    Mindset is the big one, and I await your thoughts on it. I constantly question why I continue to stay in losing trades even though all my experience and records indicate that I shouldn't. I am convinced this is the last big nut to crack, certainly for me at least.

    I didn't keep records for a long while. I've changed that mindset now and have constructed a database detailing each trade with a notes section in every case. As time has gone on I'm putting more and more detailed information in those notes (and doing it whilst the details are still fresh in my mind) and I hope one day that this disciplined approach will become my nutcracker.

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  4. You didn't refrain from pointing it out though, did you! ;) I said I wouldn't get involved in debate about it but this isn't a debate about value, I'm just giving out my thoughts. And I almost certainly will not be mentioning it again!

    I do have something which might help with your mindset, something which has really helped me recently. Will write about it soon............

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  5. "You didn't refrain from pointing it out though, did you! ;)"

    Sorry! Couldn't resist it :-)

    Looking forward to your piece on mindset.

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