The last post took an initial look at quality control in trading. This stemmed from my realization that even relatively disciplined traders (including myself) pursue markets with a level of standardization that would be unthinkably low in the business world. One of the factors that has made a Toyota, Starbucks, or McDonald's so successful is that quality is controlled, across people and settings, day after day and year after year. That requires an unusually high level of managerial planning and oversight.
Trading is often described as a business, and traders are encouraged to treat their trading as a business. Many writers talk about the importance of business planning in trading. But if traders are to truly treat their work in a businesslike fashion, they need more than planning. They need to serve as the managers of their businesses. The maintenance of quality is one important facet of that management.
If we think about trading in quality terms, we want to identify the inputs into trading decisions, the processes by which decisions are made, and the outputs from those decisions. Inputs can be defined by the information that we need to process to make our best decisions. Processes involve information processing itself, including our ability to maintain a mindset conducive to optimal decision making. The outputs from trading decisions include the orders that we place, our management of those positions, and the profits that accrue.
The first sign of quality control problems in trading is lack of consistency. Inconsistency of inputs reflects variability in our preparation: sometimes we're more prepared for trading--we've done more and better homework--than other times. Inconsistency can also be present in our trading processes: variability in our state of mind while trading and our following of rules. Inconsistency often first shows up in trading outputs: variability in profitability, but also variation in how we size trades and take profits and losses.
If a trader truly operated as a business, he or she would identify "best practices" and turn these into standard operating procedures, with careful managerial oversight to ensure that these procedures are followed. Few of us truly know our best practices, however. It is impossible to implement quality if we have not made ourselves objects of our own study.
It is important to be one's own trading coach, but successful sports teams need managers as well as coaches. Writing out a business plan is the easy part. Managing that plan over time and becoming as consistent as a Toyota: that's a challenge. More on this aspect of working on oneself to come shortly.
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