[idaxtrader]

Specific Skills that Comprise Trading Mechanics
Trading Mechanics
• Idea development. Translating observations about the market into specific trade
ideas; gathering information the right way to produce useful conclusions.
• Assessment of market conditions. Evaluating whether the market is trending,
rangebound, volatile, or slow; ensuring that the trade idea is appropriate for the
present market.
• Order placement. Using the kinds of orders appropriate for market conditions to
maximize the likelihood of getting filled at desired prices.
• Order location. Selecting prices for orders that correspond to turning points in
supply and demand, thereby minimizing drawdowns and maximizing
opportunity.
• Order division. Scaling into positions to reduce initial risk exposure and obtain
superior average entry prices; scaling out of positions to secure profits and
benefit from favorable movement.
• Position sizing. Risking enough on a trade to make a meaningful contribution to
profitability while avoiding risk of ruin under adverse circumstances.
• Position diversification. Spreading risks among uncorrelated trades so as to
benefit from market participation but limit risk exposure; selecting trading
instruments most likely to benefit from the trade ideas.
• Exit determination. Defining clear criteria for when your trade ideas are wrong;
implementing proper stops to manage the risk exposure of each trade.
• Exit flexibility. Moving stop-loss points to protect profits while retaining
profit potential.
• Speed of execution. Making and implementing decisions rapidly.
• Accuracy of execution. Minimizing errors in order placement.
• Efficiency of information processing. Monitoring relevant variables in real time
to properly manage trades. 140


they traded well, they do not necessarily mean that they made a lot of money. They mean that they were fundamentally sound. Mechanics are rarely glamorous, but they account for a surprising degree of profitability. 141


Carl was a study in poor mechanics. Let’s play observer and review his
shortcomings:
• He had no real trade idea. “We’re not going lower” is not a firm foundation for a rational wagering of one’s trading stake. The reality was that we weren’t going anywhere, as long as the market was trading a few dozen contracts per minute on average. Without a valid trade idea, he had no edge in the marketplace.
• He gave up the edge needlessly. In a slow market, there was no urgency to getting in. If he had a valid reason to enter the market, he could have worked a bid and gained a tick simply by being patient. Instead, he took the offer after the market had already ticked higher, exposing him to those who had worked bids and now could take their scalping profits.
• He wagered impulsively. A good trending market will give multiple opportunities for entry, making it easy to scale into a trade even if you do have to go at the market as the trade picks up on a breakout. Entering with his maximum position exposed Carl to maximum risk before he had an opportunity to see if the position would move his way.
• He exited emotionally. Instead of exiting when the trade didn’t go his way, he exited when it went against him. If his trade was truly predicated on a breakout move or surge of buying, it should have gone his way promptly. Instead, he waited until it reached his pain threshold before exiting.
• He did not process information effectively. At no time during Carl’s trade was there evidence of bidders entering the order book or lifting offers in size. He failed to see bidders cancel their orders prior to the market moving against him, so he could not exit quickly. 142

My goal in working with traders such as Carl is to enable them to become keen observers of their own mechanics. This means emphasizing trade execution as much as overall profitability, and it means placing emphasis on the management of trades, from position sizing through exits. The majority of traders want to think about trades as things: events that are
either profitable or not profitable. The mechanics approach to performance, however, views trades as processes. 142

Much of profitability, I’ve found, is simply staying away from markets and market periods that do not offer a distinct edge. 151

To the extent, however, that you can break your information gathering down into the kinds of checkpoints described by Nolan Ryan, you turn much of the process of selecting tactics into one of mechanics. The bottom line is that, for any style of trading, there are mechanically sound and unsound ways to gather information and make decisions from the data. 151

One mark of a truly expert trader is the ability to rapidly adapt trading tactics to shifting market conditions. When you think about it, this is also a hallmark of expert emergency room physicians, battlefield commanders, and coaches. 151

Nothing so interferes with a performance as thinking about the performance while engaging in it. Most of us are familiar with the performance anxiety that affects speakers and test takers: The worries about how one is doing take one out of the flow of doing. For this reason, your observation and evaluation of your mechanics, tactics, and strategies need to occur outside of trading. While you’re trading, you’re the trader. All other times, you’re the mentor to that trader. 157

The structural edge, to which I have alluded earlier, is based upon knowledge of the participants in the equity
index marketplace. Many of these are day time frame participants, and many are highly leveraged. This creates situations in which traders behave as a herd, jumping aboard whatever movement they can detect in the market.
It also creates situations in which these same traders have to exitpositions quickly as part of risk management. Because of this, much of the day’s trade in the ES consists of waves of buying and selling attributable to herd behavior and the mass exiting of positions that are going underwater. Identifying spots where the herd is loaded up in one direction and will need to unload their holdings if their anticipations prove incorrect provides a structural edge. 160

Profits take care of themselves when you have a legitimate edge and execute properly. 161

Pele blended speed, vision, and accuracy as no one had previously. His formula for success? “Practice is everything.” 164

performance is not about speed, but rather about process. “Being fast comes with having lean processes. If you just focus on speed, you wind up with mistakes.” This is why instructors at PIT advise aspiring crew members, “Go slow to go fast.” The goal is smooth, lean operation— not hurried behavior. 165

Surprise is the great enemy. All training is for naught if we are taken by surprise and cannot make sense of our experience. 166

Markets will move—or fail to move—just beyond the level of expectations of participants. That is the only way the ambusher can take money from the ambushed. Preparing for expectable market events is important, just as preparing for routine car maintenance is the bread and butter of any pit crew. It’s the preparation for the unexpected, however, that, over time, wins the Winston Cup. 167

his challenge that he could win any dogfight—ride the tail of any challenger—within 40 seconds. His ability was to operate from inside the mind-set of his adversary: what he called the OODA (observation, orientation, decision, action) loop. 167

When you become predictable in a dogfight, you are inside the OODA loop of the other pilot. The pilot who wins is the one who stays outside the opponent’s loop. This is why the surprise, speed, and violence of action mentioned by Machowicz are so effective. A predictable attack, such as when British troops would line up in formation in their red coats, complete with flags flying and music playing, was within the OODA loop of savvy colonists. It is the swift, unexpected, violent attack of the guerilla force that can unnerve a much larger opponent. 167

What is well known and well publicized—from chart patterns to news stories—represents the OODA loop of the average market participant. If what you lean on for your edge is information that can be readily accessed by any trader possessing a decent real-time charting or market depth application, you are within the OODA loop of the pros, not outside it. 167

My particular focus would be on the triggers for this frustration: the market and trading events that precede her loss of control and deviations from sound mechanics. We would then work on specific brief therapy techniques for deprogramming these triggers and gaining cognitive and physical control over frustration 174

The bottom line is that we cannot improve what we do not observe. Most traders haven’t the slightest idea where they stand on these various metrics, nor are they aware of how their metrics are impacted by shifts in market conditions. We spend far more time studying markets than studying ourselves, and that is at our peril. The metrics will identify trading problems before they become financial problems. They will alert you to potential blowups before you incur devastating losses. Metrics complete learning loops, linking self-observation to self-improvement. 178

The key is selfobservation: constantly knowing—and wanting to know—what works and what doesn’t. Do you really know your strengths as a trader? If not, how can you build upon them and extend them? Are you aware of the weaknesses of your strategy, tactics, or mechanics? If not, can you truly improve them? We as traders are every bit as patterned as the markets we trade. Exploiting our patterns is an essential part of profiting from those in the market. 181

Journals contain a variety of information, but usually consist of the following:
• A trading plan. How one intends to trade.
• Goals. Things to work on in trading.
• Observations. About oneself and the market. 182

The evolving performer asks: What will I work on today? How will I work on it? How will I know if I’m successful? What have I learned from today that can be utilized tomorrow? The role of a diary is to structure responses to these questions and keep them in conscious awareness. This allows us to focus on achieving process goals rather than profits.
183

The value of the real-time diary is that it pushes us to stand outside ourselves and remove the prisms. To simply ask the questions “What is my state right now?” and “How is my state affecting my perceptions and behaviors?” requires that we stand apart from our frames of mind. The diary cultivates the self-observer in all of us, building our capacity to shift our own states intentionally. 184

“The difference I havefound between the good and the great traders is that great traders are always acutely aware of areas where they need to improve and they work very hard to eliminate those weak links. . . . There is no greater tool in my opinion than a good trading diary of things you’ve learned. When I read my trading diary from several years ago, I’m always amazed how many things I’ve actually forgotten.” 184

When you examine the field of performance coaching, whether in trading, athletics, or other fields, two interventions stand out: goal setting and visualization. 185

Performance goals such as these reflect mechanics: concrete actions that, performed well, contribute to results. They keep traders in a state of flow rather than compete for trader attention and concentration. 186

the acronym SMART to capture the common features of effective performance goals. Such goals are Specific, Measurable, Action- Oriented, Realistic, and Timely. 187

Common deficiencies of goals include:
• Not specific. The goals are framed in general terms, such as “I will trade with more discipline” or “I will let my winners ride,” so that they cannot guide specific actions and facilitate the development of positive habit patterns.
• Not measurable. The goal is framed as a state of mind—“I will trade with greater confidence”—or as an outcome that cannot be tracked with metrics, as in “I will trade well,” preventing any assessment of progress.
• Not action-oriented. Goals are stated as end points rather than as activities to perform, such as “I will make money today.”
• Not realistic. Goals are pie-in-the-sky, as in “I want to be green every day this month,” or are so numerous that they cannot be addressed effectively at one time.
• Not timely. Goals are so far into the future that they cannot guide current performance, as in “I want this to be my best year trading.” 187