Profit is as Process does…


Trading is full of contradictions.  Downright irony even.  How many times, as traders, have we heard the phrase “Past performance is not indicative of future results”?  Even if your first exposure to trading was yesterday, you probably stopped counting last night.  Yet, as traders, this is exactly what we attempt to do; make decisions that directly affect our future results, based on past performance of whatever we’re trading.  Even when taken in the context of the Trader himself, this line of reasoning is anecdotal at best.  A more direct wording of the point being made is “hey don’t blame me if I’m wrong and lose all your money”.  Does anyone really think a traders past performance does not indicate, just a little bit, what kind of performance may be expected of him in the future?  Who’s ready to sign up with a mentor who’s lost half a mil over the last 24 months?  And don’t even attempt the mental exercise in futility that is trying to reconcile the “past performance” bit with the next standardized trader mantra: “This time is not different”.  Yeah… I know right!

Let me get to the point.  Past Performance IS indicative of future results.  Trust me.  If you’ve been losing money consistently, to me that’s a good indication that you’re going to lose some more going forward.  When I take a trade, the ONLY reason I do so is because I have seen something similar occur in the past, and with that information I’m betting (yep, that’s what we do) there will be a similar result, most of the time.  After all, past performance is the biggest indicator on anyone’s price chart.  Give in to this, and trading can become, [I hesitate to say “easy”] shall we say, less exciting.

Enter the Process.

Here’s the thing about “Strategy” and “Systems”.  They’re worth less than an Iranian Rial without consistency in every aspect of their application.  To ensure this consistency, build it into a process.  A simple, specific, infinitely repeatable process.  Don’t make the mistake of placing your goal at the end of the process, that’s not a process; it’s just another goal.  We’re no strangers to goals as traders.  We want to make a million dollars, or X amount or Y percent.  We want Z pips this week, and XYZ pips this month.  Or maybe you just want to get through this week with no less than you started with.

Something always goes wrong, doesn’t it?  Traders are driven to give up when faced with the rate of progress their $1000 account is making towards the $1M mark,  There’s only so many weeks in a row a human being can say “Ok, now I’m going to make $1M from $800, now I’m going to make a mil from $500, $250…”  Sooner or later the towel is thrown in or the account hits zero.  This is what happens when you wake up every day and tell yourself you need to make $999,000.

Face it, there’s no trading system in the world, that will tele-port you directly from point A all the way to point B.  Well, maybe if you’re trading 1,000 lots, one trade might make your million, but something tells me those guys aren’t interested in what I’ve got to say anyway.  The rest of us though, are limited to getting there an inch at a time, and for that we have the miracle of process.

We all use processes every day that we’re not even aware of.  Think of all the various routines you go through in a 24 hour period.  Most people have a morning routine to start the day.  Parents routinely get the kids ready and off to school.  There’s the routine route taken to the office.  Work-days routinely start with the same steps as the day before.  You’ve probably got a routine for lunch (lunch is a routine in itself).  I think you see where I’m going here.

Now look at those routines, and more specifically the processes that make each one possible from start to finish.  These routines have one thing in common.  The processes within these routines are all relatively easy.  If you’re like me, taking the kids to school might be a somewhat taxing exercise  as a whole.  Teenagers move like molasses on Hoth (Sorry Shonn, another Star Wars reference to be taken as “somewhere really cold”) in the morning.  Traffic around the schools here is a whole new level of “nightmare”, and getting back home is always every bit as tedious.  However, all of the little processes that result in the kids getting to school are actually really easy!  How many times do you wonder if you’ll be able to finish brushing your teeth?  Ever have doubts about whether or not you’ll successfully turn the key in your car?  There’s no real special skills involved in pulling that big lever down to the ‘D’ position.  Stepping on the gas when the light turns green is not exactly rocket science, nor is unlocking the doors to let the kids out at the school.  These are all tiny, super simple steps that are repeated time and time again.  If you keep stepping on the gas when the light turns green, and you’ve mapped out the proper route, sooner or later you’ll get where your going (please wait for the guy in front of you to go first, and he’s having a bad day, so no honking or “gesturing”).  It’s inevitable.

Process-roadA great example came up in a recent conversation with my friends Rob and Shonn (yes, that Rob and Shonn).  If I asked you to build a brick road from New York to L.A., that’d be a pretty tough job, and the sheer scale of the task is discouraging, especially if you’ve never built a road before.  You could easily spend months learning about surveying routes, studying topography, finding just the right mortar, worrying about the weather, the river crossings, and more.  You’re spending time, you’re spending money, and I still have no road.  Not only that, but my constant badgering about getting this road done has you pulling your hair out.  You’re not sleeping wellSo forget the road.  I don’t want you to build me a road anymore, I’ve got a much easier job for you.  Here’s a brick.  Please face west and place it on the ground in front of you.  Good Job! Thanks for the hard work!  Tomorrow, take another brick, and place it on the ground next to the first one.  Repeat this 6 days a week.  Each Monday, start a new row in front of the first row, and lay one brick each day again.  Look at that!  I’m on my way to L.A.!  Every week there’s a new row of six bricks!

I hear you.  “Yeah that’s great, but the Sun is likely to die before you get there”.

I don’t care.  All I care about is being closer to L.A. then I was yesterday, because I know a secret about laying bricks.  You see, once you start laying those bricks, and moving down the road, things are going to start happening.  You meet someone along the way, who happens to also be building a brick road, let’s call him Shonn.  After shooting the breeze for a moment, Shonn kindly tells you where he gets his bricks, and that he uses these particular bricks because they’re twice the size.  Great! You start getting your bricks from the same place, and now you’re making twice the progress with each brick.  Somewhere a little farther down the road, you meet another stranger named Rob, who is building a brick road of his own.   Rob introduces you to a new technique that allows you to lay 3 bricks at one time. So the next Monday, using Robs technique and Shonn’s double-size bricks, you make what used to be a weeks worth of progress in one swift, elegant move.   The more progress you make, the faster you make even more progress.

This only worked because laying one brick on the ground in front of you while facing the direction you want to go is easy.  There’s nothing to stand in your way, no reason not to just put that brick down.  No reason for you to talk yourself out of it, consciously or otherwise.

This approach is suited perfectly for trading.  I’ve built my trading account on 10 pips a day.  That’s my brick, the 10-pip-brick.  This is what I knew I could do at the time, with existing skills and knowledge.  Sure, I wasn’t making the big bucks, but every day I was 10 pips closer.  This was a radical change from the make-50-lose-25-lose-25-lose-lose-25 pattern I previously found myself engaged in.  The account balance was changing slower than before, but it was going in the right direction.

The fact is that if you want to trade for a living, you need consistency a lot more than you need big wins, and you already know that big wins don’t come consistently.  The implication is that looking for big wins is counter productive.  It’s smart leveraging of consistent, small gains that will keep your lights on.  Can you end each day with just a single pip of profit?  I’d bet, that if 1 pip is your target, you’re pretty likely to reach it, even if you have your cat take the trade on a coin-toss.


5 thoughts on “Profit is as Process does…

  1. Beo

    Process is fine, but the underlying market is ever-changing … thats why CTAs/black boxes don’t work consistently in FX. Process works best on unchanged environment, like playing piano or playing tennis where rules are set in stone and outcomes limited. …. FX market trades different themes/factors, etc without predictability into the near term future …

    1. mlacoco54 Post author

      Hi Beo,

      You’re absolutely right about the market conditions continuously changing. This is why any effective process used in trading always includes discovery of the market condition. Part of the process is determining what the conditions are. Don’t confuse the process with the “system/method/strategy” determines entry and exit of trades.

      Trading one system, with hard and fast rules, is mechanical trading. My opinion is that if you want to trade like a robot, then build a robot. Robots, though, are not for me; at least not at this point in time.

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