Trading review processes

[nomore4s]

It is common to see books and threads talking about testing trading set ups and systems etc but I never really see many people talking about reviewing your trades & trading so I thought I would start a thread on that topic.

To me trading is a business and should be run like a business. A good business operator understands their business inside and out and trading should be no different. This means understanding why it is making money (profitable periods) or why it is losing money (draw-down periods) and then acting on that information to help reduce draw-down or enhance profitable periods. Think of any successful company and they will all run extensive review processes to try to find ways to improve their businesses, so why should our trading be any different?

Finding ways to improve all aspects of your trading is made easier by understanding exactly what you are doing right and what areas you struggle in, this is where a solid review process comes in.

I'm not talking about just reviewing your trading stats, I mean reviewing every process of your trading.

• Individual trades
  -Entries
  -Exits
• Profitable Periods
• Draw-down Periods
• Thought processes when entering & exiting trades - reviewing trading diaries if kept.
• Trading Stats for each month, quarter, 1/2 year and full year.

For most individual trades I mark up a chart with the entry & exit listed and then review the trade along these lines
Entries

• How good was the entry?
• Did I follow the rules of my set up?
• If not, why?
• Is there a way to improve this entry set up?
• If yes, how?
• What were the market conditions like at the time of this entry?

Exits

• How good was the exit?
• Did I follow my exit plan with this trade?
• If not, why?
• Is there a way to improve my exits for this set up?
• If yes, how?
• Did I follow my plan on this trade?
• What effect did market conditions have on this trade?
• Is this set up & type of trade suited to this type of market?
• What was the share price 2 weeks (or a certain number of bars) after the trade?
• Did I miss a chunk of the move I was trading due to a poor exit(in hindsight)?
• Is there a way to capture more of this move I traded?
• General comments on this trade

If I notice any patterns emerging I try to address these issues and implement the improvements into my trading. I find this handy as I can keep my finger on the pulse as to why patterns or set ups are starting to fail and can help me to keep my strings of losers to a minimum.

Profitable & Drawdown Periods
(but this also applies to my trading Stats for each month, quarter, 1/2 year and full year), I tend to only review these periods when I either notice I'm in draw-down or after an extremely profitable period but I do a general review when I review my stats at the end of each period.

• Why was this period so profitable/unprofitable?
• What phase was the market in during this period? And how did this affect my trading during this period?
• Is the strategy I was using for this period suited to the market conditions?
• If not why wasn't this identified earlier and rectified?
• How could I have enhanced my profit in this period? Can I apply that to my trading going forward?
• How could I have reduced draw-down in this period? Can I apply that to my trading going forward to reduce future draw-down periods?

Obviously this can be a very time consuming process and a little bit painful at times but I have found the improvements it has made to my trading has been well worth the effort.

I realise some traders will think this is a waste of time and that's fine (I do what works for me) but if you do have a review process feel free to add your thoughts, as I would be interested in other ideas that way I might be able to improve my review processes

 

[Wysiwyg]

As you have noted on several occasions, there are times to be in the market and times to be out. This is a most valuable piece of knowledge to develop a trading system with.

If a trading system is correctly developed, that is proven robust before committing the real stuff, then a review of profits would be nice. Also remembering a good or bad entry is only so after the event and not indicative of future events. My

 

[nomore4s]

If a trading system is correctly developed, that is proven robust before committing the real stuff, then a review of profits would be nice. Also remembering a good or bad entry is only so after the event and not indicative of future events. My

Just a couple of comments on this.

I've seen systems that are correctly developed, proven robust in testing but fallen over when traded live. Knowing why the system failed can only be achieved after reviewing its trades. Reviewing your trades will also let you optimize your system to the current market conditions.

Reviewing good or bad entries in hindsight may not be indicative of future events but it may uncover a pattern of events that you can apply to your trading going forward.
I was surprised at just how many mistakes & bad trades I was able to eliminate from my trading after I started reviewing my trades in depth.
If you keep doing the same things you can't expect different results or to improve. I want to improve my trading so I need to understand what the weaknesses and strengths of my trading are.

 

[Frank D]

Market conditions, market conditions and market conditions.

It’s got nothing to do with your system, as your system is already proven
to work.

And I’ve said this many times in the past, it’s your own ability to effectively ‘chart read' those
market conditions that will end up improving your already ‘proven system’.

And I’ve said this many times in the past. The majority can’t effectively ‘chart read’, besides
the basics:- identifying trends and trading with trends, which for most is the most important
thing, but it can limit opportunities as market conditions change from trending into
consolidating.

Then it’s a case of optimizing your system to the market conditions, either
by trading larger amounts at certain times, trading lesser amounts at
certain times, tightening stops or widening stops, ‘hedging’, not trading
a signal given, trading with the trend or against the trend.

If you aren’t intra-day scalping small price increments you will probably have
1 maybe 2 times per month that will provide any real opportunities to
make some decent profits, either by swing trading or capturing
the next ‘trend’. The rest of the time you’re trying to minimize your losses
& risk.

What about money management?

You read it all the time…. "The most important thing in trading is
‘money management’"... but rarely do you read how to optimize
money management.

Is a price based stop a better option compared to a ‘time’ based stop?

A generic dollar stop might be a safe option, but it doesn’t mean it’s a
better option in certain market conditions.

However, a lot of this does depend on amount traded, account size,
and justifying the risk at the time.

 

[nomore4s]

Hi Frank,

I agree with everything you have said.

I just find it interesting that most people spend so much time backtesting but so little time reviewing the actual application of that testing, the thing that actually creates the profits.

By reviewing my trading in detail I've learnt more about my trading and systems then any other process.

It has helped me identify and remain in tune with the market conditions which has helped me improve my profitability and reduce my periods of draw-down. It has also helped my optimize all aspects of my trading as it provides me with feed back to where I can improve or make changes.

 

[ThingyMajiggy]

If there are people out there doing backtesting, backtesting and more backtesting, have developed a system that "works", yet they can't tell if the market is going up, down, or flat, theres something wrong isn't there??

 

[nomore4s]

If there are people out there doing backtesting, backtesting and more backtesting, have developed a system that "works", yet they can't tell if the market is going up, down, or flat, theres something wrong isn't there??

Probably more to do with identifying changes in the market earlier.

 

[ThingyMajiggy]

Probably more to do with identifying changes in the market earlier.

Please explain? (we need a pauline hanson smilie)

 

[nomore4s]

Please explain? (we need a pauline hanson smilie)

A bit along the same lines as what Frank was talking about, learning to read charts.

You develop a system that works but it works better in certain conditions or not at all in other conditions the sooner you can identify changes to market conditions the sooner you can make changes to the way you trade your system as Frank pointed out.

This should reduce draw-down and help profitability while essentially reducing your risks. Knowing when to be aggressive and when to be conservative is important imo.

 

[ThingyMajiggy]

A bit along the same lines as what Frank was talking about, learning to read charts.

You develop a system that works but it works better in certain conditions or not at all in other conditions the sooner you can identify changes to market conditions the sooner you can make changes to the way you trade your system as Frank pointed out.

This should reduce draw-down and help profitability while essentially reducing your risks. Knowing when to be aggressive and when to be conservative is important imo.

But wouldn't that all be factored into the backtesting? So you backtest it over the last X years etc, but you know the market was a raging bull market or whatever the case may be, so therefore you need to change something when the market isn't behaving like the backtesting period?

Anyway, fully understand your points, just would've thought that people would know that if they get good results for a certain backtesting period, then obviously things are going to need changing because the market isn't going to behave like that all the time.

Do you keep a diary/journal? I keep one, I think it helps, I usually record my thoughts and current important points in the market, targets etc and my trades, I get slack on it sometimes though!

Good for looking back over though, quite a few "why the hell did I do that again and again" moments

 

[nomore4s]

When trading the SPI I review each days trading by marking up a chart with my trades and then reviewing areas where I thought I could have done better and any mistakes I made and the things I did well.

I also compare to how the day played out to how I actually thought it would play out - re: DOW, Oil, copper, gold , AUD etc, and other stats I keep.

 

[MRC & Co]

Sam, the hard part is, when do you know the market is no longer a 'raging bull'? Months later and after 20% DD?

This is the advantage of 'chart reading' as Frank pointed out. You can sometimes know the very minute you go into a sideways pattern and start fading ranges, minimising stops/profit targets or staying out all-together.

Sorry to point out this specific poster, but Nizar was the epitome of a failed 'backtested' idea. He had no clue how markets really operated or any kind of discretionary overlay. Which resulted in him being severely whacked!

As far as a review process, unfortunately, I don't have much to offer there. I don't really have any specific 'set-ups' as such, it is far too discretionary. I tried to review my trades for a long time, but soon realised it was pointless for my style. Too many factors go into making a decision, and things change so quick I am constantly updating my style to the market conditions.

 

[ThingyMajiggy]

Sam, the hard part is, when do you know the market is no longer a 'raging bull'? Months later and after 20% DD?

This is the advantage of 'chart reading' as Frank pointed out. You can sometimes know the very minute you go into a sideways pattern and start fading ranges, minimising stops/profit targets or staying out all-together.

Sorry to point out this specific poster, but Nizar was the epitome of a failed 'backtested' idea. He had no clue how markets really operated or any kind of discretionary overlay. Which resulted in him being severely whacked!

As far as a review process, unfortunately, I don't have much to offer there. I don't really have any specific 'set-ups' as such, it is far too discretionary. I tried to review my trades for a long time, but soon realised it was pointless for my style. Too many factors go into making a decision, and things change so quick I am constantly updating my style to the markets.

Well yeah, that depends on your method and skill in chart reading as you say. I just find it fascinating that people have the skills to do periods of backtesting, actually come up with a system, yet cannot recognize accumulation, distribution etc. the way markets operate.

 

[Synergy]

I think it's important to compare apples with apples here.

For system traders discretion is often their worst enemy. The important thing is to follow the system. Trying to second guess the market is unlikely to be part of the system, and trying to do so will probably result in lost profit. November has been my most profitable month this year, and leading into it my gut feeling was that it was likely to be a losing month.

I'm interested in where the market is heading and i do spend time looking at index charts, but until my system switches itself off I keep taking trades.

 

[MRC & Co]

I think it's important to compare apples with apples here.

For system traders discretion is often their worst enemy. The important thing is to follow the system. Trying to second guess the market is unlikely to be part of the system, and trying to do so will probably result in lost profit. November has been my most profitable month this year, and leading into it my gut feeling was that it was likely to be a losing month.

I'm interested in where the market is heading and i do spend time looking at index charts, but until my system switches itself off I keep taking trades.

And this is why I guess I am yet to see a pure systems trader, with a fixed % DD before they know their system is not working, that makes NEAR the profit of a good 'discretionary trader' even if that discretion also includes a system of it's own but a lot of reading of market conditions and nuances.

This is my 3rd year coming up full-time and many years before that analysing the market, and as far as reading discretion, I am still a long way off being where I want to be. That being said, I have seen period where Soros chases his tail, and actually employed Neiderhoffer to work the market out statistically for him in that period, which doesn't make me feel so bad!

Good thread though, a lot of people apply the wrong methods to the wrong market environments. For those who use Radge, they will see what I mean, constantly updating his idea of market flows and strategy.

 

[Trader Paul]

Market conditions, market conditions and market conditions.

It’s got nothing to do with your system, as your system is already proven
to work.

And I’ve said this many times in the past, it’s your own ability to effectively ‘chart read' those
market conditions that will end up improving your already ‘proven system’.

And I’ve said this many times in the past. The majority can’t effectively ‘chart read’, besides
the basics:- identifying trends and trading with trends, which for most is the most important
thing, but it can limit opportunities as market conditions change from trending into
consolidating.

Then it’s a case of optimizing your system to the market conditions, either
by trading larger amounts at certain times, trading lesser amounts at
certain times, tightening stops or widening stops, ‘hedging’, not trading
a signal given, trading with the trend or against the trend.

If you aren’t intra-day scalping small price increments you will probably have
1 maybe 2 times per month that will provide any real opportunities to
make some decent profits, either by swing trading or capturing
the next ‘trend’. The rest of the time you’re trying to minimize your losses
& risk.

What about money management?

You read it all the time…. "The most important thing in trading is
‘money management’"... but rarely do you read how to optimize
money management.

Is a price based stop a better option compared to a ‘time’ based stop?

A generic dollar stop might be a safe option, but it doesn’t mean it’s a
better option in certain market conditions.

However, a lot of this does depend on amount traded, account size,
and justifying the risk at the time.

Good post, Frank ... like your style ...

Is a price based stop a better option compared to a ‘time’ based stop?

As price and time stops are each aligned to a different chart axis, we can
use them both in a complementary way, to establish better exits and to
reinforce our trading methods.

To read more, about simple price and time stops (and a whole lot more), just go to:

http://www.authorsden.com/SampleWorksPDF/10134.pdf

Happy New Year all ..... !~!

paul



=====

 

[Trembling Hand]

As far as a review process, unfortunately, I don't have much to offer there. I don't really have any specific 'set-ups' as such, it is far too discretionary. I tried to review my trades for a long time, but soon realised it was pointless for my style. Too many factors go into making a decision, and things change so quick I am constantly updating my style to the market conditions.

In some ways I'm with you. To have a look at a heap of entries and exits can have you chasing your tail. But I do review the results of my trades, equity curve, in real time and its probably the biggest help I have stumbled on.

It gives me two pieces of info if its going down, either the market is doing nothing and not suited to how I'm approaching it (or I'm just wrong)

Or I'm trading with frustration or some other form of the punters favorite excuse (discipline!!).

Dr Brett has just the post on it, of course he's referenced my blog to get his idea.

http://traderfeed.blogspot.com/2008/02/greatest-mistake-traders-make.html

 

[Timmy]

That's a great idea TH and nicely executed too.

 

[MS+Tradesim]

But I do review the results of my trades, equity curve, in real time and its probably the biggest help I have stumbled on.

Ditto. I track all sorts of stats to look for patterns in behaviour (mine and the markets). One of the more valuable ones for me has been graphing normalised R returns per trade for discretionary strategies. For example, I've noticed the normalised returns are tending to get smaller for one strategy while the absolute returns are static to slightly growing (someone fixated on the dollars would probably miss the problem!). Some of that I can attribute to slowing volume and volatility (in the area I trade) over the holiday period due to the big guys being away. However, reviewing the trades also reveals that most of them still had more safe movement left in them. As I was scaling up in size, I was unconsciously becoming more risk-averse and booking profits before necessary. I'm now implementing several ideas to combat this. The simplest of which was to hide all references to P/L on Book Trader so it can't distract me.

Dr Brett also has some chapters on reviewing in Become your own Trading Coach, but I'd guess readers of his blog would know most of it anyway.

@Nomore4s: I don't have anything to add to your OP, except that reviewing is a good way to be pro-active, to reveal patterns of change before they can become too problematic and to reveal positive patterns so they can be identified and reinforced.

 

[skyQuake]

In some ways I'm with you. To have a look at a heap of entries and exits can have you chasing your tail. But I do review the results of my trades, equity curve, in real time and its probably the biggest help I have stumbled on.

Why real time? Would it make much of a difference compared to post-trade reviews?