Profiting From Your Best Practices

Consider the following scenarios:

• A hospital studies the treatment records of 50 surgeons and finds that 10 of the doctors have a much lower complication rate among their patients than the other 40, when adjusted for the difficulty and risk of the procedure. The Medical Chief interviews and observes these top 10 surgeons to find out what they're doing differently from their colleagues. The results of the study lead to a set of guidelines that improve surgical care outcomes across the entire hospital.

• An automobile manufacturer finds that one of its plants has a much lower defect rate than the others and yet is just as productive. A team of managers goes to the plant to observe quality control procedures. This leads to changes at all of the plants that improves auto quality and consumer satisfaction.

• A pit crew for a NASCAR driver videotapes each of its practices and races and measures the time it takes to get the car back on the road following routine stops. By watching the videotapes and comparing the quick and slow times, the crew figures out how to position themselves on the track to shave tenths of seconds off their times.

Each of these situations is one in which best practices guided performance improvement. We can think of best practices as continuous learning tools, in which we learn from what we do best--and learn to do it more often.

What are your best practices as a trader?

Do you even know?

Incredibly, many traders keep journals and records, but never think to isolate their best practices. They simply don't know what they do well and why it works for them. As a result, they can't learn from their successes.

Here are a few best practices I have identified in my own trading:

1) I enter a position with a relatively small portion of capital and add to the position within a short amount of time if market conditions continue to look favorable. My research of my own trades told me that many of my losing trades started out in the first few minutes as losers. The winners were either winners in the first few minutes or hovered near breakeven. With a small initial position, I get smoked when I'm small and ride winners with larger positions.

2) I religiously follow what large traders and the majority of stocks are doing. Consistently, my winning trades go with the flow when large traders are dominantly hitting bids or lifting offers. My winning trades also ride the tendency of the broad market to trade at the bid price vs. offer (as measured by the NYSE TICK).

3) I put a trailing stop on my intraday P/L. Quite simply, if I'm up a decent amount of money on the day, I'll only allow myself to lose a portion of it before I stop trading for the day. A winning day thus never turns into a loser, but I can continue to selectively pursue opportunity.

4) I trade the most volatile instruments that are highly correlated to my main market, the ES futures. So, for instance, I'll add a unit of capital to the Russell 2000 futures rather than double up in the Spooz. My research found that what I was trading was adding as much to profitability as how I was trading (specific setups).

5) I trade almost exclusively during morning hours, when I have my best feel for the market. My research has found my afternoon trading to be, on the whole, no better than breakeven. All my profits have come from morning trades.

Obviously, your best practices will be different from mine. The idea is not to mimic someone else, but to be more of who you already are when you're at your best.

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com and a blog of market analytics at www.traderfeed.blogspot.com. His book, Enhancing Trader Performance, was recently released for publication (Wiley).