Continuing the series “7 Lessons I’ve Learned”, we come to Lesson 5: Your Path To True Mastery Will Require Extensive Reviewing and Tweaking.  In order to be the best, you need to constantly review your performance and look for improvements that you can make. Typically, these will be a series of small, incremental steps and changes—“tweaks”—rather than sweeping, wholesale changes. In this piece, we’ll explore how investors and traders can review their work and identify the tweaks they need to make, in order to reach their performance objectives.

Peak performers, the very best at their field, are usually the most obsessed with reviewing their performance and making changes. Famous artists and top athletes are always evaluating their work and bubbling over with ideas on how to change. In interviews, you will hear them say things like “I’m trying to get a little better every day”. They are always trying to tweak some aspect of their performance, whether it’s a new skill to add to their game or to bolster an existing part.

In fact, constant tweaking and review is how they get to be top performers. In his book The Cambridge Handbook of Expertise and Expert Performance, peak performance researcher Anders Ericsson studied the development of skill and expertise amongst the best performers. One of the factors that they identified was deliberate practice, which he defined elsewhere as “highly structured activity, the explicit goal of which is to improve performance. Specific tasks are invented to overcome weaknesses, and performance is carefully monitored to provide cues for ways to improve it further”. As an example, an elite basketball player didn’t just “practice” as he evolved into a top-flight performer. Instead, he engaged in numerous activities that fulfill the definition of deliberate practice. He practiced running the length of the court with a stopwatch; he had 3-point shooting exercises from individual parts of the floor; he practiced the mechanics of his free throw technique. All of these are specific, carefully monitored and designed to boost performance. All of these entail constant review and tweaking.

In my upcoming book, I lay out a three-part approach to taking risk in the markets: Plan The Trade, Trade the Plan, and Review/Tweak. The third part is just as important as the other two, because it is the step where we take an objective look at how we’re doing and then we make the necessary changes. These can cover the whole gamut, from being changes that jut stop the bleeding – a necessary step towards improvement—or tweaks that help us go from good to great, like from returns of up 18% to up 25% per year. Either way, we want to incorporate reviewing and tweaking into our approach as a necessary and critical step for building our skills, staying on track and getting better.

We know that constant skill improvements can lead us to greater performance. But how do we make that happen as traders and investors? How can we implement the disciplines of deliberate practice, of monitoring our performance and improving it? The first step is to monitor our performance. That means keeping records—the more extensive, the better. There are some obvious things that you would track: P&L, which trades you are putting on and taking off, etc. These are the core of your performance and I would hope that you are tracking them.

But all of that is just the tip of the iceberg. You need to track a broader range of things and more deeply than you have been before. Many athletic coaches have used this approach to achieve amazing results. Sir Dave Brailsford, the coach of the British National Cycling team, led the team to multiple gold medals and its best performance in century. Famously, he tracks or monitors everything possible—even minute details such performance variations depending on the seat height, air flow with different postures and different pedaling motions. He would try to eke out small, perhaps minimal improvements in each area that he monitored, but it would lead to a massive increase in performance. As he puts it, “The whole principle came from the idea that if you broke down everything you could think of that goes into riding a bike, and then improved it by 1%, you will get a significant increase when you put them all together”.

For instance, I recommend tracking your P&L as regularly as would fit your style. If you are an intraday trader, you want to monitor one or more times a day. Even if you are a long-term investor, you will want to monitor your performance daily or weekly, just to have a useful data series. Let’s dig down a bit deeper. You will want to track P&L not just overall, but by different sorting mechanisms. Perhaps you want to track P&L as a function of risk taken— when you take more risk, does your P&L rise commensurately? How does your P&L do by type of trade—do you make money on momentum or reversion to mean? Are you better at deep value or at growth stocks? These are questions that you need to have the answer to, so that you can make the proper diagnosis.

It goes further. You’ll want to track what kind of positions you are putting on, breaking it down into as many components as need be. You could go so far as to code it by how it performs on every item of your checklist, like we discussed in-depth in Lesson 3. That way, you could evaluate which of your checklist components are the best for generating P&L. Over time, you may find that your lowest conviction positions are not actually making you money and may in fact be costing you. In that case, you will want to raise your bar for conviction and hopefully your P&L will also improve. You should also track market conditions that are relevant for your style, to see how your performance can fluctuate depending on changes in market conditions.

The management guru Peter Drucker had a great saying about data: “What gets measured, gets managed”. In order to know where we stand and how we may need to change things, we need to have data. This is one reason why I advocate tracking anything and everything that’s relevant: you need the data as a raw input for review. But there is another reason which is more subtle. Just the mere act of keeping data forces us to look at the results, often for the first time. It could be the first time that we have an understanding of how we are actually doing. And as I explained in my post, The Unresolution, that can be the first step to change.  Often, the mere act of observing something starts the process of change, as we notice that something is out of line and we automatically or subconsciously seek to fix it.  By observing and tracking data, we are not only amassing the data that we need; we are actually starting the process of making changes.

How do we know what changes we need to make? It comes from two directions: fixing a problem or reaching goals. The first is very much corrective, where we see a problem that stands out and we address it. The second is figuring out what changes we need to make to hit a target that we’ve set. These require different ways of thinking, so we will approach them separately. In either case, it’s important to keep in mind the famous Indian saying: “The best way to eat an elephant is one bite at a time”. We want to take a piecemeal approach to our improvement. It can be very seductive to say “I just want to make a lot more money right now”—who doesn’t? But by itself that statement is no good because it doesn’t tell us how we get there.   The way to get there is to figure out the smallest changes that we can make and to advance steadily and incrementally towards them.

In his book the Slight Edge, author Jeff Olson singles out the key to real progress across a number of disciplines: sustained daily effort, however minimal. By doing just a little bit every day, we cultivate the habit of working towards our goal. While the progress each day may not seem like much, the cumulative effect is actually considerable. We want to have this consistency mindset because the changes that we are making, even if they seem small, can add up to a considerable result after all is said and done.

If we are reviewing, we can easily spot basic problems, cases where something isn’t working at all. Sometimes they just stand out. For instance, people who trade very well most days and then lose lots of money around big economic releases. Another example would be someone who does very well in trending markets but who keeps doing the same thing in trendless markets and gets ripped apart. Or a stock investor who employs three different strategies, only to see that his first two strategies are generating more than 100% of his profits. All of these are cases where the necessary changes just stand out and are obvious. The solution is simple: stop the bleeding! Whatever is not working at all, just cut it out entirely.  

Then there are more nuanced cases of how to identify what needs changing. The right problem or the right answer may not necessarily jump out at you, so you need a way of approaching it. It starts with your plan, just like we discussed in Lesson 3.  You should have a well-documented plan for how you will get in and out of positons and how will you manage risk in real time. If you don’t, then get one, immediately. But assuming that you have a plan, then you want to see how you are sticking to your plan. Remember from Lesson 1, trading is most about making good decisions—and equally important is being able to carry them out. If there is a gap between how we are planning to do things and how we are actually doing them, then we need to drill down and isolate that.

As one example, a trader could be generally profitable, but be unhappy with profits that have dropped from previous highs. Upon closer inspection, he realizes that his plan calls for taking losses when a position goes 3% against him, but recently his average loser has actually been 5%. In this case, we can guess that he is not respecting the stop loss targets that he has set himself, so he needs to make changes so that he sticks to them. It could mean putting in automatic orders in the book; it could mean finding an accountability partner at the office to remind him when a position hits his stop loss; it could mean widening his stop losses to something that he will stick to, but at the same time, boosting his take profit targets. All of these will help to address the problem.

Another example of this would be taking positions that were too big, leading to disappointing P&L. Many investors and traders that I speak to want to make as much money as quickly as possible but end up taking positions that are too big. This practice will definitely make your P&L more volatile. More worrisome, it will influence your ability to take risk properly. As we explored in Lesson 4, this one of the many cases where our risk decisions can influence our psychological state, leading to mistakes. For instance, you could be scared by the size of the loss and close it out in a panic before the position hits your stop loss. Conversely, you may be tempted to take profits too soon, just because you have such a large gain in financial terms. These are both mistakes that can be corrected, by reminding yourself all the time to keep your pre-set plan. You can also help yourself by reducing the amount of risk that you take, so as to make it easier to stick to your plan. But these are tweaks that you could make only after checking your original plan versus your results.

A third case for when to make review-driven changes is when you are not noticing improvement. You could have tried several tweaks earlier, but you are not seeing any changes in your results. You could have tried implementing several changes to your routine, but your life circumstances made those too difficult to sustain, so you need to contemplate other changes. This is a case where nothing is wrong per se but you want to keep getting better, so you will pursue a different tack. You want to work on the critical area and pursue other changes. Here, it is a case of identifying the same area where you can do better and then trying to push it in a way that will be more effective.

The other approach is to set goals and then make the necessary changes. You can start with basic goals—such as P&L or capital employed—and then work backwards from that goal to figure out what needs doing on a more micro level. For instance, if you wanted to increase your profits by 20% in a year, what would that entail?

• The most straightforward way would be to increase your position size by 20% and keep everything else the same. Your profits should rise by 20%
• Work on your position sizing
  • Tie position size to conviction, so that you are bigger in the positions where you have the most conviction
  • Dial up and down your position sizes depending on whether or not a position is working
• Figure out things that you can change that will boost your profits
  • Trying to hold on to winning positions longer so that you earn more from them
  • Trying to cut losers more quickly—maybe at a 6% loss instead of 8%, for instance.
  • Trying to boost your win rate—perhaps by ditching one class of investment that doesn’t work as well as others
• Add on new strategies that can boost return or reduce losses
  • You can add an uncorrelated strategy to your repertoire that will smooth out your overall returns, e.g. adding a mean reversion strategy if you’re a momentum trader
  • You can add on a hedging program, so that you can prevent yourself from ever drawing down too much. This could mean buying options to protect yourself; buying/selling futures; or just reducing risk at the right time

These are completely different steps to take, but they are all driven by a pragmatic approach to getting better. If you want to see an illustration of this approach in action, read Ari Kiev’s Hedge Fund Masters, in which he encourages portfolio managers at a famous hedge fund to set stretch goals. From those ambitious goals, he works backward with each of them to figure out what they need to do to make it happen.

Apart from ambitious or stretch goals, you should also be setting and working on smaller, more incremental goals. These are process goals, not P&L goals. As an example, you may want to get your win rate up from 40 to 42% in the next year. That will require a couple of tweaks, such as putting on fewer marginal positions. Another example would be boosting your average holding time on positions by 10%– invariably, this will mean holding winners longer and trading less frequently.  Either way, the fruits of these changes will flow through into improved P&L. But here, you are targeting process goals which you can control more than P&L, and you let the outcomes take care of themselves. I described this in more detail in my post “How to Bounce Back From Failure in Trading”, which has a lot more detail on this process of incremental improvement.

The last thing to review are variables that you wouldn’t normally consider, but which have an indirect impact on your trading. These are things like mood; happiness; energy levels; etc. You should have a general of how you’re doing with respect to these, and keep track of them in a journal. This is a place where you write to yourself about what’s going on—what you’re thinking about the markets, how you’re doing overall, etc. You should have a general idea of what you’re doing, how you’re feeling, if you’re stressed from outside influences.

Let’s go one step further—start tracking this in some quantitative form. You could have a spreadsheet that keeps track of your mood and energy levels on a simple scale—say, 1 to 5. Over time, you would notice fluctuations in your mood and energy. They could be related to the weather, to the waxing and waning of your health, or to big events in your life—births and deaths in the family, divorce, etc. You could see how these various outside influences correlate with your results. The very act of reflecting and writing about it will make you feel better and help you to cope with stress—think of it as a valve to release excess pressure.

The tweaking comes when you start making changes so as to boost your overall health and well-being. Do whatever you find healthy and re-energizing. It could mean spending more time with your family; sleeping in on the weekends; adopting a healthier diet; taking up a new sport; or doing something creative, if that’s your thing. These are tweaks that would boost your mood and health and indirectly improve your results. But you wouldn’t know unless you were monitoring these things. Remember, “What gets measured, gets managed?” But this is the kind of second-order tweak that can still improve your life and your results. The flip side of this is when you envision some stress down the road—like the birth of a child—then plan for it advance. Cut back on the risk. Free up more time for rest and relaxation. And track how you feel.

Together, this philosophy of review/tweak should allow you to make the 1000 little course adjustments that unlock higher levels of success. Building skill and achieving excellence is a long, arduous journey, and it is only through constant efforts that we can attain peak performance. If we want to get there, we should start tracking, reviewing and tweaking today.

 No relevant positions

By Bruce Bower | E-mail: Bruce [at] howoftrading.com

Blog: www.howoftrading.com | Twitter: @HowOfTrading