I teach a 4-step process of "Plan-Prepare-Execute-Assess" in order to systematically and continuously improve my adaptation to the market and trade effectively.
Plan: A top-down procedure to identify tradable targets in the time frame I have chosen, or which chooses itself. My criteria: targets are tradable symbols that have evidence to support the hypothesis that they are in a “critical state.” I define a critical state as a moment when there is a larger-than-normal probability of a larger-than-normal directional move in a shorter-than-normal time frame and where the amount and cost of information required to disprove the hypothesis is relatively small. Critical states occur in companies, sectors, broad indices, countries, regions, asset classes, and the market itself.
Prepare: The due diligence to develop a bi-directional trading strategy, complete with decision points and their criteria for action, key price levels, and rehearsals to practice for contingencies in both directions.
Execute: Implement and measure the rehearsed and prepared plan that was executed on the basis of actual price signals received.
Assess: Routine and rigorous evaluation of each trading session, each trade, and each decision while in the trade on the basis of information available at the time, and then expanding the assessment to include system performance, histogram analysis, and self-analysis on an ongoing basis.
Each of these steps follows a procedure that can be evaluated. A documented process can ALSO be analyzed and assessed for continuous improvement. Having a proven, manageable process for continuous learning and improvement is certainly a trading edge.
I have been writing and titling this 4-step process in the following way to make a point about where to focus:
For me, ASSESS is where I want to be at my best because THIS is where I LEARN about what to do next. It’s the only step where we can discover if the market/sector/target has moved away from our perfectly planned, prepared, and executed strategies. So if I can "perfectly" assess, then I am on track to know what I CAN know about my own trading and where it needs to go with respect to a dynamic market. If I haven’t "perfectly" assessed, then I don't really know if what I learned was correct, or what I should have learned but didn’t, and what rules, systems/parts of self need to change.
My next highest priority is on PREPARE. Good preparation is 10 times harder than error-free execution because it takes into account things that might happen. Execution is easier after proper preparation because it takes into account what IS happening. If I have prepared well, then I don’t have to stop and think in the trading-moment to decide what to do, which would interfere with quality execution. My ideal would be to take into account ALL of the things that might happen in priority of their probability and potential impact. Realistically, I proceed from preparing for the most likely/most dangerous possibilities and then add scenarios and contingency plans as time permits. I know I am prepared when I am clear about how I will act when certain specific events occur, and I have done the reward-to-risk estimates for the trade frames in both directions. If I have prepared well, then I have rehearsed the decisions and criteria for executing different scenarios. This preparation lowers the stress and complexity of execution. I know that I will ASSESS the preparation so that I know I will get continuously better at it.
If I am satisfied with my ASSESS and PREPARE steps, then I concentrate on Execution with an emphasis on exits. My ideal here is to reduce the signals required for effective decision-making to a minimum in order to focus on reducing the time between sensing and responding. I am concerned with dashboard construction, redundant signals, rapid execution of decision-cycles, and error-free rapid implementation of my decisions in a bulletproof execution system. There is a clear connection between efficient execution and the details you need in preparation to be ready to focus on and act on the necessary signals. The primitive "caveman drawing" I posted in a March 7th case study, hides the levels of depth and rehearsals that go into hardwiring my decision-making at key price levels. Don’t confuse primitive and simple with shallow and unprepared. There is an elegance in properly simplified systems that leads to robustness and effectiveness that at times feels like it is approaching art or artfulness in the hands of a craftsman or artisan. I know that through ASSESSMENT and PREPARATION, I will get better at EXECUTION.
Four images of the Plan-PREPARE-ASSESS-Execute Ecosystem
The least important yet necessary of these 4 steps in the process for me is planning. I say least important because it is the easiest to standardize and automate when it comes to identifying locations in the price range of the lookback period, the time series of volatility and momentum, of the target and its peers in the sector, and the target and sector within the market, and of the market itself.
Creating a large relationship diagram, like a spider web, connects all of these pieces in a sense-making network that can act hydraulically to identify targets, sectors, and the market that have entered critical states. So, the plan just has to quickly and efficiently cast a wide net to gather enough "least-correlated" targets to ensure I have enough targets to PREPARE for the trading session ahead. I know that through ASSESSMENT, PREPARATION, and EXECUTION that I will also get better at planning.
I will learn to look for things that caught me by surprise and found me unprepared when they happened. Because I won’t trade things I am not prepared to trade, I only suffer the opportunity cost of not trading what, in retrospect, looks like a tradeable event/move.
So, consider how you might make improvements in your trading process in the way you think about and implement these 4 steps.