Tales of a Technician: Perfecting Your Process Part One
February 15, 2017
Last update: August 2021
Shout out to Lijia Wu whose insightful question inspired today’s topic. One of the phrases I’ve always used is, “traders should be process-oriented, not results-oriented.” I can’t remember if I borrowed the wisdom-laced adage from someone else or if it originated in my noggin’. Either way, she’s a gem.
Everyone wants positive results. That pot-o-gold at the end of the rainbow beckons to traders one and all. But only those with a sound process ever reach it. The rest get distracted by their P/L halfway across the arc and fall off into the abyss of coulda-shoulda-wouldas.
Being results-oriented means you obsess over your position (or portfolio’s) current P/L (that’s profit/loss for you rookies) and use it as your sole guidepost for decision making. Positions with big profits elicit ecstasy and chest-pounding while those boasting losses bring bleakness and despair.
And it’s tough not to look at the P/L when it’s staring you in the face 24/7 at the bottom right of the monitor page (if you’re using ThinkorSwim). Like moths to a flickering flame, your eyes just can’t resist. So here’s a suggestion. Hide it! There’s a privacy setting where you can hide your portfolio value and year-to-date profit (Account Info>Net Liq & Day Trades>Privacy). Check out the yellow arrow in the graphic below:
How you manage your trade should be a function of your process (aka your plan, your rules), not the current results. And here’s the beautiful thing, if your process is sound then positive results are virtually assured. At least in the long run.
Let’s use your typical passive, diversified portfolio holding investor. He’s established a sound portfolio full of stocks, bonds, and commodities, and is adding money to it each month. The objective is to grow the money at 5% to 10% a year over the long haul (which by historical standards isn’t crazy).
Then, a bear market strikes. And in the depths of the drawdown, our dear investor glances at his P/L and notices his portfolio is down 25%. After shaking his fists and cursing the market gods, our naïve investor promptly sells everything to mitigate further damage. “I’m no fool” he reasons. “I’ll get out now before it goes down even more!” Fast forward two years, the markets returned to new heights and our poor investor realizes he blew his process to smithereens by jumping ship at the exact worst possible time.
Was his process sound? Yes. Did it have a solid chance at delivering him to that pot-o-gold filled with 5% to 10% annual returns over the long haul? Yes. Did he let it happen? NO! Because for a brief moment he became results-oriented.
Options traders can make the same mistake. Let’s say Lijia sells monthly Iron Condors on the S&P 500. She has rules determining when to enter and exit. And she’s backtested the system and discovered it does indeed produce positive results over time.
Then, she goes live. The market gods smile upon her, and she starts with a sweet winning streak – five profitable months in a row. Then, adversity arrives in the form of a strong trending market that delivers back-to-back losing months. Lijia’s eyes gravitate toward her shrinking portfolio value. Her dwindling profits are too much. So she drags her Iron Condor system kicking and screaming into the barn and ends its misery.
Fast forward six months and Lijia discovers she abandoned her beloved bird at the exact wrong time. Little did she know, the Iron Condor was on the cusp of a multi-month winning streak right when she put a bullet in it.
Unfortunately, Lijia allowed the temporary negative results to drive her decision-making instead of her tried and true process.
Now that we’ve fully fleshed out the idea of being process-oriented we can move forward to the question at hand: How do you perfect your process? Stay tuned for next week’s missive.
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Tales of a Technician: Perfecting Your Process Part One
Traders should be process-oriented, not results-oriented.
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Lijia sounds like me in 2008. Good advice, Tyler.
I look forward to these articles, so thank you!
Excellent advice AND good timing. As a new trader my emotions can sometimes get the best of me. I’ll remember to stick to the plan… it works!
Love this Tyler: “Traders should be process oriented, not results oriented.” That is a full 180 from what I was required to do in my work career. Appreciate the mindset rearrangement!
Great article! This is very good advice. Thanks!
Always good stuff!