5 ways to improve your trading for 2024

Every year I perform a review on my trading results, and outline steps to improve my process for the next year. I identify areas where I made too many mistakes, and tweak my process so that I make fewer of them. The process is like making new years resolutions for trading, but unlike most new years resolutions that people make and then forget about within a month, these changes must be integrated into your trading process in a systematic way or else your trading will stagnate over time.

The new year is also a time for reflection on your relationship with the markets and trading as a career. In this post, I lay out five ways you can improve your trading process and become more self aware and mentally flexible as a trader:

Journaling - I’ve written about the importance of keeping a trading journal in the past. If you’re not journaling already, then starting a trading journal is a powerful way to tighten up every aspect of your process and become more self-aware. If you already are journaling, then there are ways to improve your journaling process, such as adding a pre-mortem, writing out how much you are risking vs the reward if you hit your target, or identifying mistakes that you might be making as you enter the trade.

I am by nature a trader who has no shortage of trading ideas and risk appetite. I’m good at identifying winning trades, so my main challenges are being selective on trades and reducing losses. The journaling process has helped me figure out what type of trades have lower expected outcomes for me, as well as reduce costly mistakes. Software such as Edgewonk allows me to track multiple metrics on every trade, such as the type of chart setup I used, the source or inspiration of the trade idea, the time horizon, and anything else you can possibly think of. Using Edgewonk, I was able to identify my two costliest mistakes - chasing momentum and moving my stop away from the market. Over the past several years I’ve reduced the occurrence of these mistakes and the pnl impact from them.

Tighten up your risk management - I typically use stops for most of my trades, but I have a love/hate relationship with them. I know stops protect my downside, but there have been times when I wasn’t able to mentally accept getting stopped out and I didn’t pull the trigger when the market reached my stop level or I moved my stop away from the market. My trading journal showed me how much this was hurting my pnl, so I have integrated several methods to tighten up my risk management:

1. Input a stop loss order immediately after entering a trade.

2. When I enter a trade, mentally visualize my stop getting hit and taking the pnl hit. That way, when it actually happens, I’ll be mentally prepared to get stopped out and won’t make rash decisions like moving or cancelling my stop.

3. Whenever I feel good about a trade going in my direction, take the opportunity to tighten the stop. Don’t let a sizable profit turn into a loss.

Let go of last year’s mistakes - It’s good to reflect and take note of what went wrong last year. Figure out a way to improve your process so that those mistakes don’t happen as often. After that, feel free to let go and forgive yourself for making those mistakes. Nobody is perfect, and the emotional burden of past mistakes and losses can be debilitating to your performance if you hold on to them. Tying your self-esteem to your trading performance only serves to magnify the emotions attached to trading outcomes and can cloud the decision-making process.

Listen more to the market and to the views of people that you trust - One of my faults is that I have too much conviction in my own views and am sometimes blind to signals that the market is turning. For example, when the US fiscal deficit and treasury supply became the big thing in August-November, I was steadfast in my view that 30 yr Treasury yields would reach 6%. I was directionally right for a while, but was slow to react when the Treasury market bottomed. I failed to realize the significance of the quarterly refunding announcement that turned the market and downplayed the significance of the string of weaker economic data. This resulted in me giving back a lot of the profits from shorting Treasuries and missing the dramatic squeeze in risk assets in November. If I had listened closely to the market price action and to some of the research and analysts I follow, I would have been quicker to position for the change in macro regime.

Identify and let go of the things you are trying to get out of being a trader that don’t have to do with making money - Believe it not, many traders are in this game for reasons other than making money. Often, they don’t even realize it. For some, the thrill of being right and outsmarting the market serves as the primary motivation for trading decisions, which can often lead to denial and poor risk management when the market doesn’t cooperate. Some people are driven by the elevated status traders have within an organization, resulting in the ego playing an increasing role in their trading. Others are drawn to the sense of community and camaraderie that comes with being a market participant and would rather squander their pnl than lose their place in that community. One example is how Wall Street Bets labelled those who exited their longs “paper hands” while those who held on (often to their detriment) were called “diamond hands”. The shame of being a paper-handed trader probably prevented many traders from making the correct decision of taking profits or cutting losses.

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Disclaimer: The content of this blog is provided for informational and educational purposes only and should not be construed as professional financial advice, investment recommendations, or a solicitation to buy or sell any securities or instruments. The blog is not a trade signaling service and the author strongly discourages readers from following his trades without experience and doing research on those markets. The author of this blog is not a registered investment advisor or financial planner. The information presented on this blog is based on personal research and experience, and should not be considered as personalized investment advice. Any investment or trading decisions you make based on the content of this blog are at your own risk. Past performance is not indicative of future results. All investments carry the risk of loss, and there is no guarantee that any trade or strategy discussed in this blog will be profitable or suitable for your specific situation. The author of this blog disclaims any and all liability relating to any actions taken or not taken based on the content of this blog. The author of this blog is not responsible for any losses, damages, or liabilities that may arise from the use or misuse of the information provided.