The Trading Plan – 5. Process Management

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Process management entails regular processes and routines that are followed to enforce adherence to the signals and rules or the system or strategy, risk management and money management components of the Trading Plan.

All successful traders and investors have a meticulous set of processes and routines that they follow with discipline and consistency. They have a daily routine that involves market analysis, review of existing positions, trade placement and record keeping. They ensure this happens at a similar time and place each and every day. These traders are process driven in both their engagement of the market and the application and understanding of their trading system. They are NOT overly concerned with the results of individual trades (either winners or losers). They are concerned only with the application of the rules of the system (the process) as they know that over a large sample their trading system’s edge will allow them to be profitable, provided they stick to the process!

Discipline is required at all stages during the process of active investment until executing the process becomes effortless, habitual and flawless. 

Here are some considerations for inclusion in your Process Management section of your Trading Plan that will assist you in becoming process orientated rather than focused on the outcome of individual trades;

• Set aside a specified time every day to undertake your market analysis, trade identification, and trade management. This includes running scans and assesing existing open trades in a portfolio.
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• Undertake this role in a dedicated space that is quiet and comfortable, and where you are able to focus 100% on the task at hand.
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• Keep details of all trades in a portfolio manager, diary or spreadsheet, so that you know all the details of your open positions and pending orders.
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• For trade entry, ensure that only instruments specified in your trading plan are entered; if your trading universe is shares, don’t suddenly decide to have a random trade in the gold market simply because everyone seems to be talking about trading gold!
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• Always position size according to the rules you have specified in your Trading Plan and especially do not size too big during very positive market periods.
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• Always predefine your entry and exit criteria for every trade, prior to trade entry, i.e your trading system/strategy rules. This may also include the protective stop loss level as well as profit taking levels or prices at which the trailing stop may be adjusted.
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• Develop a process for monitoring and managing open positions, and recording these details.
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• Develop a process for monitoring market conditions to determine when you will have money in the market and when you will move partially or totally into cash, i.e. part of your risk and money management rules. For those trading multiple systems and/or multiple markets, this may also include moving funds between these systems according to individual performance.
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• Maintaining a journal with entries for each transaction that details all that you are thinking, feeling, saying and doing at the time of the transaction. Measure these journal entries against what your Trading Plan states. This will capture your trading journey over time so that you can review your growth and degree of improvement.
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• Mindset processes. This is to do with trading psychology. In this section you state how you will organise your thinking and mindset to remain focussed, consistent and objective in executing your processes and what regular and specific actions and processes you will take and deploy to achieve this so that current market conditions do not hijack your process. Examples include:
  • Repeating aloud, every time a trade is executed, carefully crafted auto-suggestion sentences such as Mark Douglas’s Five Fundamental Truths and / or Seven Principles of Consistency and / or any other trading affirmations that you may have constructed.
  • Mental rehearsal, before the markets open, of executing your processes flawlessly or visioning yourself executing your processes flawlessly according to the rules in your Trading Plan.
  • From a big picture view, visioning the edge and equity curve analysis of your edge playing itself out in your trading environment. This assists in building trust in the big picture outcome for your edge so that you do not get derailed by the small picture short term outcomes. It keeps you true to your processes rather than becoming attached to short term outcomes that take you off track.
  • Conducting breathing exercises to achieve calmness, a feeling of peace and a reduced level of arousal; or breathing exercises to achieve focus and create a link between mind and body, to achieve self-control to remain true to your methodology processes.

Managing the trading process will enable you to remain emotionally detached from the outcome of individual trades and will allow you to focus on managing the performance of your trading system or systems according to the predefined rules of your trading plan.

All this will lead to the ultimate aim of becoming consistent and objective which in turn will lead to achieving your mission in the markets and your reward and risk objectives as stated at the outset of your Trading Plan.

Do not take short cuts with your Trading Plan. If you don’t have one or it is not completed to the standard discussed in the last 6 Blogs then “get to it”. Now that you have this knowledge you have no excuses not to do it.

This is the last post of the Trading Plan series and the final journal entry to conclude 2011. The Share Wealth Systems Team wish everyone a very merry Christmas and a happy and safe 2012.