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In our traders masterminds, we recently gathered together a number of successful professional traders and looked into the qualities that made us successful. We settled on eight words that started with the letter P to help us focus on the successful traits.

They are: persistence, preparation, participation, practice, performance, perception, position sizing and preservation.

This essay looks at the fourth P. successful trading: Practice.

There is an old saying that practice makes perfect, but there's another saying it's even more true: perfect practice makes perfect.

In sports, the idea of practice is to create the muscle memory that will allow your body to instinctively perform properly under periods of stress, when the game is on the line and there's not enough time to think. At times like these, your body will automatically do the things that he has been trained and overtrained to do.

In the military, this phenomenon can also be found when it comes to training battle drills. Military battle drills are designed to help soldiers survive on the battlefield under periods of great stress when thinking about the next action takes too long and may lead to death. The military strategy for training is to overtrained a task until it becomes second nature.

In a process of iterative training, the military will gradually increase the complexity and realism of the training situation until it becomes indistinguishable from the live event.

For example, a soldier may move from rifle marksmanship using dry fire techniques, to the use of blank ammunition, to the use of training aids and devices, to live fire under controlled conditions on a daylight range, tonight fire under controlled conditions, today like fire and maneuver, to nighttime fire and maneuver, to training with smoke and uncertainty.

Each progressive step adds complexity and uncertainty in the soldier is trained to respond to the environmental cue.

Traders can learn from this strategy by taking the individual pieces of their system apart and mastering each component. When components are mastered, the trader should then start putting the pieces together and paper trading the system without money at risk. Once the signal is fully understood and decisions are rehearsed, a trader should then begin prototyping their live trading with small dollar amounts to add the reality of real money at risk.

Once the trader can successfully trade with real money and in small position sizes, additional risk can be accepted and positions gradually increased until the trader discovers his natural risk appetite, which can be defined as the point at which the size of the position begins interfering with decision-making. Once that's been done, the trader now understands current level of normal trading capacity.

Throughout the process of practice and rehearsal, the trader should be keeping a trading Journal in which his progression can be documented and reviewed as a way to improve professional competence.

 

 

Ken Long, Chief of Research, Tortoise Capital Management