It is counter intuitive to many, I could almost hear : “What? Focus on Process and not on Money? This is ludicrous. Then, why am I doing trading or investing!”.
Allow me share a quote, and I have to admit that I was mildly surprise to see this quote from a great investment mind Warren Buffett, as focusing on Trade Process is something I read in many trading related books. With a short moment of pause, it makes perfect sense that Buffett has this quote, I realized that the great investment minds also basically focus on their processes (usually more insightful, elaborate investing process) but these are usually mid to longer term time frame. Without further ado, here goes:
“Games are won by players who focus on the field, not the ones looking at the scoreboard.”
~ Warren Buffett
The above sentence pretty much summed it up. If you get the true essence of it, this article could literally stop here, but I digress.
So, what exactly is a trade process?
To understand what Trade Process is all about, think about a skill or a sports that you have acquired in the past... On second thought, perhaps, I could start with something even more basic.
Let's talk about how a baby learn to walk. As a baby, we started by first taking our tentative steps (like your first few 'test' trades), while we try to hold on to objects around us. In the process, we took some bumps and knocks. Our body system is hard wired genetically to avoid pain, hence, from that very young tender age, we have to learn, and learned fast that when we make a mistake, the price we have to pay is 'pain' (similar to 'pain' in loosing money when trading).
According to some studies, a baby needs about 1,000 of practice time to fully learn walking. By that number, assuming a person diligently uses 5 hours a day to learn the craft of trading / investing, he would take about 200 days (or about 5 and a half months) or if the person could only spare 30 mins per day, it would take 5.5 years. So, the next logical question is: “Are we exaggerating the amount of time needed for a person to excel in something?”, the answer is a definite “No”.
According to the book Outliers, Malcolm Gladwell (bestselling author of Blink and The Tipping Point), who studied how and why world renowned experts who became top in their respective field, says that it takes approximately ten thousand hours of practice to achieve mastery in any field. Is this any surprise..? Objectively look at any professions (Engineers, Lawyers, Doctors, Architect etc) or world class artists or sportsperson, I guess you get the point. Hence, while 'physically' placing a trade with a few keystrokes or calling your stock broker, is seemingly easy, to achieve some level of mastery with repeatable consistent results it is another matter altogether.
So, what problem does it present when someone start trading without being aware of the process?
"Good decisions come from experience. Experience comes from making bad decisions."
~ Mark Twain
It is a common pitfall that a novice trader will initially focus on money (who wouldn't? It is only natural, otherwise, why do we trade?). However, therein lies the pitfalls. Some potential common mistakes make by novice traders are:
Lack of System / Plan:
Enter the stock market with little or no knowledge of the stock market.
Not doing (sufficient) homework or studies about the stock, market or instrument.
Buying a stock on 'tip', rumor or on a whim.
Totally not aware of the existence of a trade journal.
Knowing some indicators and chart patterns, but fail to be patient and wait for only the best opportunities.
Taking profit too early.
No following / aware of the existent of a Trade Plan.
Too many open positions at any one time.
No Proper Risk Management:
Committing too large a trade size than one could handle or worst still, go into leverage without knowing the potential pitfalls.
Fail to set stop-loss before / at the time of initiating a trade.
Average down on loosing positions with knowing the necessary parameters.
Letting losses run.
Emotionally not ready for trading.
Addiction – Over trading.
Herd instinct – Follow the 'bus' crowd.
Letting Fear, Greed and Hope took control of the mind.
Tendency to blame everything else except to look inwards, or raise one's self-awareness.
And the list could go on...
If you have some trading experience, you'll probably identify with some of the mistakes listed above, which is part of the learning process.
So, what exactly is the trade process..?
"Follow effective action with quiet reflection. From the quiet reflection will come even more effective action."
~ Peter Drucker
The trade process includes (but not limited to) how to monitor the market / information for trade ideas, planning for a trade, knowing of the kind of scenario and chart setups that one would trade on, what trade size to put on when placing a trade, where is the stop-loss level (if trading instead of investing), what's the exit plan, self-awareness during each stages of the trade sequence, making objective observations of market before, during and after a trade, having a trade journal to record the observations and reasons to initiate a trade etc. In short, pretty much every aspects of each trade.
As a matter of fact, successful traders knows trading should be treated like a business, where losses are to be treated to be part conducting a business. They also knows that it is far more important to be an excellent trader and make each trade as perfect and flawless as possible instead to focusing on how much money to make. They knew that what they have to do is to manage risk (and making sure that it is manageable, example, by managing trade size, with continuous price movement and liquidity), instead of keep thinking of how much money they could make from each trade, knowing that, amount of money to be made depends on how much the market is willing to give, not by their wish.
In summary, learning to trade or invest well is like any other learning process. One has to focus on the important aspects of the process in order to improve. By constantly focusing on the trade process, one will gain insight and instinct about the market and improve his / her trading. Successful trading and investing, hence, is about both knowing the market and yourself.
With this, I'd like to end with a quote:
“Practice does not make perfect. Only perfect practice makes perfect.”
~ Vince Lombardi
Enjoy the journey!