P&L Discipline - Record your success.

[nine]

On another board there is a P&L thread which is, I think, quite inspiring for new traders who perhaps are doubting whether it is possible to really succeed. This is a great thread but I'm not sure that recording P&L is the right way to chase improvement. For me, quiet continual improvement is the key to trading.

I agree with Kiev that setting goals is important. And that achieving goals is a great source of happiness. But I don't think that aggressively chasing monetary goals is the key for many (most?) traders. The key, once you have a strategy which you can write down, is to follow it with consistency. Most of my problems come from deviating from my strategy. Perhaps you aren't perfect either?

When managing a business you want to record what's important to business success and the bottom line is not the key to success in most businesses (although it is a record of how well the other things are working). Thus, each week I have a set of goals and the last one is a weekly financial goal. The first four this week relate to consistently trading my system.

So I propose a P&L thread where your profit and loss are records of your discipline. They record how well you followed your system. I'm going to post my daily P&L and perhaps you'll join me - it should help us to focus on what is important. In the next post I will propose a way of recording your success.

 

[nine]

Measuring the Right Stuff

So, if you want your business to improve you must measure the right stuff. And the right stuff for most businesses is the stuff that will improve the business's processes so that its market share and its profits will improve to get the ultimate goal ... financial P&L. We've all heard that focussing on the money will kill you in day to day trading ... just as focussing on the money will kill you if you're running a business and you should be trying to make a better widget, make a happier customer etc etc. So lets focus on how well we execute our system.

There are other threads on trading plans (make one if you don't have one) and journals (a good idea) so none of that here. Instead I propose 4 measurements of how well you execute.

First. Is the entry 100% in accordance with your system? 3 = 100%, 2= not bad but something was incorrect, 1= not in accordance (not a system trade, chased, etc etc.)

Second. Did you place and execute your initial stop correctly? This is the "I won't lose more than X points stop" and should be placed where your written system says it should be. 3 = yes it was, 2= I moved it closer but the system didn't tell me to, 1= it was wider than it should have been or there was no stop. If you really don't put stops in the market then apply the same measures to your mental stop.

Third. Did I exit the trade by the system? 3= perfect system exit, 2= slightly off (target too close, trailing stop slightly too close or too wide), 1= damnation, why did I do that (whether it makes more or less money than the system exit its still a 1 if its off track).

Fourth. What proportion of system trades did you take. Shown as a percentage. Now, this is a funny one because I go for the best system trades and will skip trades where the context feels wrong. Some will be damaged by such selectivity (you know it if you skip 2 trades and then take the third which is a loser ... and do this more often than you feel good about). But, whether you must take every trade or can be selective its worth recording.

So my ideal is to get 333 trades and probably, in my case about 35% of potential trades.

My record for yesterday would look like:
333 332 231 332 --- 25% (yes there were 16 opportunities).

I'm going to post this each day unless no one looks at the journal or I get bored with it. I invite you to do the same ... hopefully it will keep you focussed on doing the right things rather than chasing the money on that next trade.

I invite you to read Jay West's article at:
http://www.ensignsoftware.com/tips/tradingtips52.htm

Also, FWIW, my trading is based on:
http://www.trading-naked.com/FloorTraderMethod.htm

 

[nine]

So, does anyone else think that this is a good approach? Do you have any modifications?

Is measuring process performance the way to drive improvement?

A little trading song I posted in another thread that speaks to the issue:
http://www.youtube.com/watch?v=xiNQSbcOYNQ

 

[barjon]

hi, kiwi

Enjoyed the song - sung with "feeling" I thought :cheesy:

Seems a good measurement to see how good is your system discipline and thus will help improve discipline.

Whether it improves overall performance depends on whether your "off system refinements" (including opportunities taken) added to, or subtracted from, the potential system result if it had been obeyed 100%.

good trading

jon