Process.
The most abused word in trading.
It gets overused and abused with virtue-signaling to the point of losing its meaning, and that's a problem because, listen closely, newer traders won't make it if they don't work to incorporate key process into their trading workflows. That's right, they won't make it.
Over hundreds of traders I've worked with, I can count on one hand the number of traders who have any real semblance of a trading process before they begin training at Apteros. The saddest thing I see from the trading world is the number of traders who think they have a trading process, but don't, and spin their wheels without a repeatable operating system.
What is Process?
Process is a set of repeatable steps to follow given a set of inputs/conditions. The action or inaction (which is an action if it's conscious choice) is taken with the information at hand at the "hard right edge" and is taken confidently because it is knowable and repeatable. What happens from then - in the future - is unknown and unknowable. Amateur and childish focus on this future unknown is the source of most trading problems. Guess what traders who don't have a process tend to focus on as they try to make trading decisions?
Process a standard operating procedure. Process is rules. Process is if/then statements. Process is a checklist. Process is a repeatable and objective - even if it involves discretionary elements within it. (More on that later)
Why is Process Important?
Process is not only important for any and all traders at all levels of skill and experience, but it is particularly important for newer/developing/struggling traders. An analogy from sports to consider:
- •If you are learning to play golf vs a professional golfer, while important for both, which golfer should be more consciously focused on how they hold the club, or how far away they stand from the ball? Thhe beginner of course, not that it's not equally important for the professional, but they have ingrained habits and muscle memory and can use some discretion to actually alter standard grips and stances based on more conditions and tap into creative shotmaking. The beginner is nowhere near ready to make those types of decisions, nor lean on any form of intuition- they should be entirely focused on their process for making sure they are doing the basics well. This is an incredibly powerful analogy from sport we can easily apply to trading.
Without a process (think operating manual or checklist to make a decision) a newer trader is lost. A struggling trader is even more lost due to experience and bad habits. Without process a trader thinks they have "stats" on their trading - but it's a big heap of trash - an illusion that they have anything repeatable at all. Uptrends in equicy curve will come with feelings of invincibility and pride. Downtrends in equity curve will be devastating and destroy confidence.
If you don't have process as a developing trader, you have no benchmark to compare your actions to. You have no truth of right and wrong. You will simply succomb to hindsight bias and spend years spinning your wheels and frustrated. Process is what gives you a way to make decisions under pressure, and a way to fairly judge and review your actions after the fact based in something real.
The Four Fundamental Components of Trading Process
Risk Plan
There is no sustained success in trading without a solid risk plan. I like to include it in any good Trading Process. You may average down into a losing position and "save" yourself from that loss a few times, but eventually you fill face the music. I also recommend keeping risk consistent per trade. Sure there are many out there who teach you to "size up" in your best trades, but for 95% of retail technical-based traders- I find that to be bad advice. That's another topic for another day.
For now, what do we need in a risk plan?
- •Daily Loss Limit - This is really a non-negotiable for proprietary traders. It's true that some longer term traders may not use a daily loss limit (most still do), and instead have annual or monthly or quarterly risk limits. The point is all traders have a max permissible loss over some appropriate period of time. For intraday to swing traders, this often makes sense as a daily loss limit. How to choose the amount? Typically it will be given to you by a backer or risk manager, but if you are on your own, use the next point about risk per trade and figure out how many attempts per day you need to give yourself ample opportunity to succeed and you'll arrive at a daily loss limit.
- •Risk Per Trade - Determine how much you want to risk in order to find out if the next instance of your edge will produce a winner or a loser. It's that simple. If you have a tighter stop (entry price is fairly close to the point of stop loss) then you can size up the position in order to target your risk per trade. If the stop needs to be wider (further away from entry price) then the position size should be smaller in order to again keep risk per trade consistent. Don't try to make risk per trade perfect to the nearest dollar - just keep it within a reasonable band as close to target risk as possible.
- •Giveback Rule - There's nothing worse than allowing a really large profitable trading session to turn into a disaster. We can protect against this. Not only that, but many traders find that they lose their appetite for risk when they are decently profitable on the session- fearing to lose the precious winning day they value. A giveback rule can both help a trader not to screw up a quality session, and help them to keep swinging when conditions are hot. A giveback rule has a threshold that activates the rule, and an allowable giveback. For example, say the threshold is being up $5,000 on the session. Once a trader has realized (closed) PL of at least $5,000, the giveback rule is actiavted, creating essentially a new daily loss limit. Where to set the new limit is up to you and your preferences and trading style. Many traders settle around giving back somewhere between 10-50% of the threshold. We like to often think in 'units of risk' (see point 2 above on risk per trade which we call an 'R value') so if that the trader had a $1k target risk per trade (R value) and therefore was up 5 R on the session, many traders would stop trading if they went down -2R from the threshold (stopping in this case at +3R).
- •Other personal risk rules - This could be any other personal risk rule you need to have in place to keep you from harming your track record. One of the more common examples would be something like a limit on the number of re-entries at the same trade idea; or a strict no trade time of day based on historical underperformance; or no trading before a prep hs been fully completed. Up to you here, but write it down and follow it.
You are nothing without your risk plan. It is sacred. If you do not treat it with an absolute respect and reverence and integrity, you will not make it for long.
Idea Generation
This is the hardest one to get nailed down. A trade idea should be entirely separate from trade execution. We have trade ideas, and then we have execution tactics to access those trade ideas. This section is on the prior.
One comon way people get process in place for trade idea generation is to build out a playbook. Essentially it's own set of process/rules that define the necessary conditions and considerations for you to have a trade idea - to become bullish or bearish a market. There's a ton of great material out there on building playbooks, so we won't cover that here, but general advice is to not try to be the trader that can trade any and all conditions - but rather start building a set of "plays" that you can identify and then look to trade. As you gain proficiency with each playbook trade, you will do a few things: 1) you will likely specialize and start to develop variations of the same play, and 2) you will start to observe new patterns and over enough sample size they too can become playbook trades for you.
The other way people handle idea generation is to use more of a set of general frameworks and decisions to arrive at trade ideas. Many NADRO style traders use this approach, doing a series of top-down analyses to arrive at conclusions about whether they have a strong directional bias for a market, at what prices the idea is valid, and what would cause the idea to become invalidated, and whether or not that then opens up a fresh (opposite typically) opportunity.
Regardless of the specific approach to Idea Generation - it's critical that you have a process for ranking and distilling market generated information relevant to your trading style and timeframe(s) that you lean on to determine whether opportunity is present or not in any given market.
Entry Timing
Recall we said that actual trade execution (including entry timing) is separate from idea generation. Totally separate. Come up with trade ideas (generally using higher timeframes, or at least higher level data points than execution), and then drill into execution. This is beyond the scope of this article, but using higher timeframes / lower timeframe in this manner has tremendous benefits. I digress.
Pulling the trigger is one of the hardest moments in a traders day. Especially if you don't have a process! Leaning on something objective, first knowing a Trade Idea is present, and then going through a process to determine if/when to pull the trigger and put the trade on - this is a tremendous and necessary tool for traders.
Take over-trading for example. What if instead of "trying to make money", the trader was focused on 1) knowing they've gone through a process for idea generation and they know whether or not they have a present opportunity, and 2) then switching to Entry Timing process to calmly determine if/when to pull the trigger. This is WORLDS APART from how most losing traders operate on a day to day basis.
We're not here to tell you what entry trigger you should use. We are here to take a very unpopular stand though and tell you that your entry trigger is one of the least (that's right) least important parts of your overall trading process. There are nearly limitless ways of entering trades - of determinging the actual moment to pull the trigger. They might involve limit orders or banging in with a market order, or using stops to enter on breakouts or momentum. It might involve heavy use of orderflow tooling, or it might involve a suite of indicators. At the end of the day most traders are either buying pullbacks, or buying extremes, or buying breakouts, or any other form of momentum or mean reversion. You know what's going to dictate the ultimate success of the system? The Idea Generation. What happens is that people don't have a process, and they don't have an edge, and they don't have skill and they execute terribly and over-trade and go on tilt and blah blah blah and everyone likes to then say that "oh I had a great idea, I knew it was going up" so the scapegoat becomes the execution. In reality they had 575 different "ideas" of what the market would do as they traded, and yes some of those ideas were "i think it's going up" so that's the ones they remember when hindsight proves that yes, you are indeed a market genius and it did go up, but your exeuction just sucked. No you just suck at all things trading actually because you don't have a process for any of it. You are the meme of the guy putting the clown makeup on in the mirror.
So figure out (as simple as possible at first) rules for Entry Timing.
Trade Management
This is closely tied to Entry Timing as well as our Risk Plan, as if we are entering a trade we need to know where the stop should be, and then what we want to risk per trade, and therefore how to actually size the position before we act on the entry trigger. So with that said:
We need to have a process in place for managing trades - win or lose.
Managing losing traders is typically hard for the trader who has not yet experienced enough pain and failure to finally do as we said before and fully submit to the sacred Risk Plan. Once the trader has reached that place of humility, then quite frankly 'managing losing trades' is a non-issue. It's easy. Your process calls for a way of placing stops, and if the trade goes there - you stop out.
Managing winning trades, however, is one of the biggest differentiators of trading style and niche that exist. Two traders could take the exact same entry, and perhaps even have the same stop, yet one could manage a trade in such a way they are a "swing trader" and the other could do things that get them labeled a "scalper." Trade management is huge in terms of the style and personality of the trader/system. Not only that, but staying in trades and letting your winners run is generally the hardest thing to do for traders of all experience levels. Many overcome taking losses, but few master holding winners. Guess what helps with this? You got it - a PROCESS for managing winning trades.
A process for managing winning trades does not have to be complex. It can be, but it does not need to be for you to find success. In fact, in many of the most profitable traders, you will find some elegent simplicity (borderline dumbness) in their process. It's so easy to find a reason to give into the fear of giving back open PL that you become emotionally attached to. You will always find a reason to give into IF you don't have a process to reference and lean on.
Determine the type of trader you want to be. Hold runners for larger wins? Or book more smaller moves? Scale out to book profits and reduce remaining risk? Or hold for all in all out larger R multiples? Add to winners? There are numerous things to answer. There are no free lunches in trading. Most decisions you make around trade management are in fact trade-offs. If you boost risk/reward you typicaly lower win% and vice versa, generally speaking. One hack I like to suggest for traders to help them determine some trade management (and niche) style they prefer is to do what they hate less. Do you really get triggered when a large open winner comes roaring back and stops you out at entry or for a loss? Or... do you more so despise when you do decide to trail a position and come out to not let it roar back against you, but instead it then turns and keeps going for the exact monster winner you were looking for? Most of us have one of these two as a major preference over the other - it's ok to lean into that and build some or all of your trade management process around that preference.
Without the benefit of hindsight - there is no such thing as perfect trade management. Pick a style - pick what you are tyring to repeatably capture from the market with your winning trade management, and learn to be OK when that looks "dumb" in hindsight. I can assure you that acting like a dog chasing their own tail flipping your trade management tactics after every "this would have worked last trade" is a recipe for somehow the markets gods making sure that it's the wrong choice every time. You can absolutely have some complexity to trade management and sometimes hold runners and sometimes not - us NADRO traders do that - the key is that you just need a process for determining the Trade Idea / Playbook trade you are trading and then know which trade management tactics you want to apply accordingly. Per the process.
Adjusting Process
Do not adjust your process, once you get one in place, too frequently. I see traders all the time that try to change their process after an end of day review. This is a huge mistake and if your process changes every day then actually you have no process at all. Stick with it. The beginning trader should be more focused on the quality of their decisionmaking and execution RELATIVE TO their process anyways, rather than trying to curve fit their process daily to achieve PL. Once you dial in a process in a meaningful way, revisiting it quarterly is a good general rule of thumb. Oh and don't delete the old document! Copy it over and edit as v2, v3 and so on because I can guarantee you there will be times as a trader where you want to return back to what was working, or you start to recognize new patterns where certain tactics/process work better in high/low vol conditions and such.
Process, Discretion, and Intuition
If you've been reading this article carefully, you will have an idea of what this section will say. Think back to the analogy of the learning golfer. It's important for them to be focused on the basics, and to have some process/checklists they are conscoiusly stepping through before they execute a shot. The pro golfer on the other hand might have a lot of discretion, or even intuition about how to approach a unique situation. They too will have checklists and process they focus on depending on their needs and current goals, but they have earned the right to be more discretionary after years and many tens of thousands of hours of practice WITH A PROCESS until it is so ingrained in them - so much a habit - that they can operate at higher levels of discretion and intuition. Traders seem to want to bypass this hard work and time, and it leads to their demise over and over.
Wrap Up
Are you excited about process yet? You should be. It can be THE thing that changes the trajectory of your trading career, and finally put you on a path to make better quality decisions under fire, and to have a grounded-in-truth benchmark to gauge your decision quality against for review work and iteration. It's a game changer.
"My process is a better trader than I am" - Merritt Black