How many times a day do you check the market? Either on your phone, PC or tablet? How many positions do you have and check at these times? How many watchlist names?
If your answer to these questions is similar to my own then you will be checking the market 10+ times a day and looking at up to 10 positions and 10 watchlist names.
So that is 10 times a day looking at 20 items = 200 decision points. Each of those decision points involve multiple decisions:
Should I enter here?
Do I exit here?
Do I move my stop now?
Do I book some profit now?
Do I trim my position now?
Is it acting well?
When should I check/act next ?
Now all of a sudden we are looking at 1400 decisions that need to be made! No wonder we can sometimes feel stressed or overwhelmed and make suboptimal decisions or misread the market.
Here are 3 Ways to Start Making Better Trading Decisions
1) Regain Your Focus
It is important when trading to make the best decisions we can, with the information we have. This requires focus and concentration. When we find ourselves with too many decisions needing to be made, we can no longer concentrate fully and we end up making snap decisions that are often less than optimal. If you have ever uttered the phrase “that was a tough day” or “rough day in the markets”, then you’ve likely been a victim of decision fatigue. You also probably looked back a few days later and said “What was I thinking!”.
Lets go back to basics and start with the plan. Your trading plan should be your guide as to when and how you make any trading decisions, when you enter, moving stops, exit strategy and so on.
The key to a decision-friendly plan is to have some flexibility within it to allow those decisions to occur naturally, rather than your decisions being at odds with the plan.
So rather than having a rule that states take 25% profit at 1R, try going with the rule that you will take up to 25% profit around 1R. As an example -if you see your stock go straight past your 1R level and continue higher and you decide to take 20% profits at 1.5R or if it only gets to 0.9R and you take profits, you are still following your plan and are mentally in good shape as you are trading to plan. This technique not only makes decision making easier mentally but also gives natural zones of interest where you are required to make a decision. Good adverbs to have in your plan are “around”, “up to”, “or greater” , “or higher”, “or lower” and so on.
This brings us neatly to setting alerts or drawing lines/zones on our charts. Use these to draw your attention to when you have a decision to make and when you don’t. With these marked on a chart you can instantly determine whether or not you have reached a decision point and what decision that is. I prefer to use zones rather than actual levels as that allows some decision time and reduces the pressure to decide right here and now.
The simple technique of setting an alert both higher and lower than the current price at the next decision point allows us to focus only on what we need to and just observe everything else. The habit of giving yourself space and time to observe rather than act will bring you more in tune with the market conditions and lead again to better decision making over time. (TrendSpider is a charting service that actually allows you to set alerts in this way).
Once you get into the habit of setting these alerts based on your trading plan you can add to these by using your knowledge of the market and how your stocks trade to set additional ones during your end of day analysis. As an example, I will generally set additional downside alerts when I see any of my danger signals and upside alerts when a stock gets into a momentum burst or parabolic move.
2) Improve Decision Quality
Now you have reduced the number of decisions that need to be made at any point – how can you make better quality decisions?
In Annie Duke’s book “Thinking in Bets” a number of techniques for better decision making are discussed. I highly recommend you read or listen to her book for the full description of these techniques, but in my view, two of these techniques have particular relevance to swing trading and they are as follows:
1) Optimal course of action:
Essentially this boils down to a mindset change where you no longer think in terms of right or wrong, only shades of grey or percentage probabilities. Any decision we make as traders will have a certain probability (or chance) of being the optimal decision. As we can’t foresee the future we can never know for sure what that probability is. What we can measure though is our confidence level in any decision we make and this is what we need to consider.
An example: I am 80% sure this is the best spot to take profits today so I take some profits. The outcome of this decision is then divorced from being either right or wrong. If it was indeed the best spot, it’s one of the 80 times in a hundred (80%) you determined, if it wasn’t then it’s one of the other 20 (20%) either way you are considering the accuracy of your decision not whether your decision was right or wrong.
This is a frame of mind that takes the ego out of your decision making process and instead considers the optimal course of action for you and your system. As you start out with this you will find yourself often not knowing how confident you are and peg it as 50/50 – if you end up in this situation you most likely don’t have enough information to decide upon the optimal course of action and may be better off delaying that decision or determining what additional information you need.
In my day to day trading I like to think in terms of probability of outcome and have at least 70% confidence in my decisions. That to me is an edge and gives consistency and reliability to my results and allows me to trade without fear or greed becoming factors. If I am less than 70% confident, then I always defer to the market and let it play out until such time as I am again confident that I’m making the optimal decisions.
2) Mental time travel:
This is a technique which is useful when faced with more complex decisions like whether to cut a trade that is moving upwards but very slowly so you can enter a new position. It is basically looking at it from two separate points in time and assessing whether it makes a material impact or not.
First consider from a time in the past – how did you envision this trade working? was it a moonshot? or did you expect a slow steady grind? Then consider it a year down the line – In a year’s time will it have made a difference if you cut it and entered the new trade?. You may well have expected this trade to be a quick 30% gainer from a past perspective and from your future perspective it may have sucked up capital which meant you missed a big move elsewhere, or it may be that you have taken 400 trades in year, so it makes no difference at all.
You see how these perspectives can help you frame the decision and decide upon the optimal decision at this moment.
The human brain is extremely good at this mental time travel, if you let it, and all it requires is 5 seconds or so to take that journey.
3) Rate your Decision Making
When trying to improve any skill it is important to have a baseline which you can measure progress against. It is therefore worthwhile to have a decision log you can refer to – this can be very simple like rating your decision making on a scale of 1-5 or noting down your decision confidence in your trade journal.
For many years I noted them on my charts when I cut/scratched trades or moved stops etc. Over time my decision making has improved, it’s far from flawless and always a work in progress to get better – but that’s the game.
We all make those low probability and sub optimal calls from time to time but if you are honest with yourself and rate your confidence in them you will find that like myself they generally come from a place of low confidence. On the flip side, even if you are 80% confident with a decision and it doesn’t work, that is exactly as expected at least once every 5 trades – You didn’t make the wrong decision, so don’t tweak anything, be consistent.
In summing up – making better decisions will impact directly on your Profit & Loss. So take some time to cut out those that are not necessary, think in terms of probability and detach them from your ego (being right vs being wrong), allow them to occur naturally and within the context of both the individual trade and the overall strategy. Finally commit to improving them and track your progress.
I hope this article gives you some food for thought and in some way helps to improve your trading and results.