3 steps trading methodology
Hello Traders, Thiru Nagappan here, founder of Master the Markets, Elite Traders Conference and The Traders Open Day.
Today I want to talk to you about the three step trading methodology.
What is the reason for even talking about this? All the 20,000 traders that we’ve coached and at all the conferences and seminars that we’ve talked at, traders usually come to us and tell us they’re having difficulty executing their strategy, or they’re just not getting anywhere. They may have two months of consistent profits but then lose all their profits. Or even just over a week they may earn a few profits but then lose them again. Some are just not sure how to get it constantly progressive and gradually profitable. They ask ‘How do I do all these things?’
This is when we talk to them and ask whether they have the three steps which are critical to making a trader successful. Not only successful in terms of profits alone but also to review their strategy so they can see where they are going wrong, what to optimism and what to correct so that they can push their equity curve to positive territory.
Let’s go through these three steps. The first one is what we call the strategy component. That’s what most traders are really all after – strategy after strategy after strategy. That is only one third of the whole three step methodology. In this strategy component you need all your rules to be written out. We’re talking about three main categories but I’m not going to delve into this too much, I’ll just touch on them. We’re talking about entry rules, stop loss rules and target rules. They need to be further sub-categorised as well. For example, the entry needs to be done in the re-entry and post-entry rules. Next the stop loss, there’s the initial stop loss and the trailing stop loss rules. Finally the target, there’s the pre-target and intra-target rules. You need to write all of them down. The single most important word in this whole rule writing is quantification. If your rules are not quantified, the second and third steps become totally redundant. All the time, effort and money you put into the market become a waste. So you definitely need to quantify those parameters and the best way to quantify properly will come with the second step.
The second step is what we relate to the psychology component. Let me tie these all up together in case you’re wondering how the quantification relates to the psychology component. With the psychology component, what we’re actually looking to achieve is consistent execution. Here’s the thing Traders, pay attention to this because if your parameters and rules are not quantified, you will not be able to consistently execute it. For example, a fitness instructor tells a guy that to lose weight he just needs to exercise regularly. The guy goes home and thinks that makes sense. But he wakes up the next morning and thinks ‘What did he mean by regular exercise? Do I just go walking every day? Running? If I go running, how far do I need to run every day? What speed?’ If he doesn’t know all these parameters, he can’t consistently execute anything and he won’t be able to quantatively assess at the end whether what he did was right and how he could improve because there’s nothing to compare against. For consistent execution the most important thing is the psychology component and you need to keep working on your mind. I can’t stress to you how important this is. One of the top UK millionaire traders keeps working on his mind consistently. The man who has one of the biggest hedge funds in the world meditates every morning. Continuous work on the mind is so critical.
One final thing, once you’ve got consistent execution and you’ve got quantified parameters, the last one is what we call the optimization component. The whole purpose of your optimization component comes from stats review. I think most of you would have figured this by now already because if you do not have your parameters quantified and from quantified parameters you’re not consistently executing it, then finally when you assess those results that you get from your trading what happens is that those stats become invalid, insignificant and totally redundant. So all the effort that you’ve put in becomes useless because those results are not useful anymore because they were not quantified first, therefore you cannot consistently execute, and therefore what stat is there to see. The crazy thing that comes to my mind is that two weeks ago when I was coaching this trader, he was one of the very few people who raised his hand when I asked at the last seminar ‘How many of you have got a trade log to analyse your stats?’ and only one or two people raised their hand and he was one of them. I did some one on one coaching with him and I asked him ‘Show me your trade journal and your stats.’ He showed them to me but before I even analysed them, my immediate question was ‘Was this consistently executed from quantified parameters? Can you show me your strategy rule sheet please?’ He said ‘No I actually don’t have strategy rules.’ I’m not surprised at this anymore because I’ve heard this so many times now. He agreed that he was not doing the right thing and that’s why for seven or eight months he was not making any profits. So this is my point. Even though you may be trade logging everything, if the parameters are not quantified there is no way to consistently execute it and your stats are useless. All your time, money and effort has totally gone to waste.
So Traders, do it right and do it well. To do it well, you have to do the three steps: the strategy component, the psychology component and optimization.
That is a very good way of you getting into a good pattern of improving your trading and keeping it sustainable and consistent. The most important thing is the stats review and if your stats are not good, then go back to your strategy component, think about the parameters and go back and do the steps again. Once you are achieving satisfactory results and are consistently making money then you have a strategy that you can replicate and scale and after that you are monitoring its performance.
So they are the three steps. I hope this is useful because it is so critical. Until the next time, as we always say, stay disciplined, follow your trading plan and keep Trading Like a Master.