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.

Will the real orange Gatorade please stand up?

I was a pretty active kid, and drank Gatorade by the gallon.  There was something special about the taste of this magical elixir, scientifically engineered not for any normal thirst, but for that serious, Deep Down Body thirst.  Everyone had their favorite flavor, and you had a one in three chance of guessing anyone’s preferred thirst quencher.  It was either Red, Orange, or the original Radio-Active yellow.

Today is hot.  Hot enough to make me thirsty, and I’m talking about that Deep Down Body Thirst that could only be quenched by an Orange Gatorade.  As I walked into the convenience store, I thought “How convenient! They have a whole cooler section of Orange, that’s awesome”.  Thoughts of my kids complaining about never being able to find their preferred flavors were fleeting.  After all, there’s orange, red is over there, and look there’s a bunch of RA-Yellow right in the middle.

I don’t lose a second when I get back into the car.  I can’t get the cap off fast enough.  I mean, it’s really hot.  I steady myself though, because I know that watery, bland, tastes-nothing-like-an-actual-orange goodness is milliseconds from my lips…

Well, it took copious swishing of scalding hot coffee to burn the foulness out of my mouth after that first huge swig.  These days, it seems you must specify exactly which Orange Gatorade you want, because there’s approximately 6,463 (ish) flavors of Gatorade, which are orange in color.

I’m not sure what it was supposed to taste like, but I think they were going for Cantaloupe.  Sure, I’ll take responsibility for not reading the fine print where it reads “Fierce Melon”, but who in their right mind thought this was a good idea?  Oh, and if you’re buying Gatorade for your kids, and they want grape, it’s not purple any more.  Apparently “Grape” has been replaced with “Fierce Grape”, which is blue.  Unless they’re looking for “Frost Riptide Rush”, which you only thought was grape because of the purple color.  If the new blue “Fierce” grape still isn’t the right grape, they might be wanting “All Stars Grape”, which is also blue.  And don’t worry if you’re still coming home with the wrong flavor… there’s only one more that might be the “grape” you’re looking for, and that’s “Berry Rain”.  While it’s actually purple, it’s more of a translucent, “laboratory-grade” purple than anything resembling a piece of fruit.

Now that I’ve spent a good deal of my first post ranting about Gatorade’s triumphant squaring of Baskin-Robins flavor count, I’ll get to my point.  My quest for quenching brought to mind a recent conversation I had with my good friend Shonn Campbell (@planteautrader) at our favorite cigar lounge.  Indicators.  Like Gatorade, you better be sure you know what flavor that squiggly orange line is, because it may or may not be the the orange you think it is.

Clearly, this is a sell signal.

Traders use indicators for everything.  We use indicators to get into a trade.  We use them to get out. We use them to know when to move our stops and where to take profit.  If we could, we’d have an indicator to tell us what to have for dinner.  New traders especially, fall victim to deceptive flavoring and color scheming of indicators.  Don’t get me wrong, I’m not one of those “naked chart” guys, and I wouldn’t know what to do with “table” mode in my platform.  What I do know however, is that there’s not a single indicator that gives buy or sell signals.  It’s up to the trader to interpret the seemingly arbitrary information provided by the indicator, and chances are most people can’t even determine why that particular information is relevant to their trades, let alone figure out whether the Bollinger Bands with a -30 shift that are applied to the Stochastics on the RSI of the MACD are saying buy or sell.  To top it off, while we spend all this time looking at, and trying to interpret 16 indicators on our chart, we completely lose track of what the actual price of the instrument we’re trading is doing.  Odd, considering the only thing that determines whether we accomplish our objective or not is a change in price.

Speaking for myself, I can say with absolute certainty, that I have lost money I didn’t need to lose, while searching for that magical indicator that was going to earn me 10,000% by next Friday.  I never did find that one, and it’s not because I didn’t look.  Now, if you’re an experienced trader, consistently taking profit from the market, then you probably know what there is to know about the indicators on your charts, if you even have any.  However if you’re a new trader, learning the ropes, you’re probably thinking that an indicator is going to give you an edge, and eight edges must be better than one right?  Wrong.

So if you’re having trouble with consistency, do a quick review of the indicators on your charts.  Is the information they provide relevant to your strategy (you’ve got a strategy right)?  Are multiple indicators giving you redundant data with mixed signals?  Are you buying tops and selling bottoms because RSI and Stochastics told you to?  If you’re not happy with your trading, you could very well be blocking your own path to success with that huge pile of indicators.  Take a deep breath, clear your charts, find some good support and resistance levels on a time-frame not measured in seconds, and try trading price for a week or two.  The results may just surprise you.