Trading Improvements: Grading
I have been toying with the idea of writing a series of blog posts that highlight various changes I have introduced to my trading that resulted in substantial improvements in the profits and my P/L curve.
I will start with how I used the system of grading my trades to make my returns larger, and more consistent.
Trade Evaluation
In the first post I want to talk about the importance of grading your trades. There is so much in trading that is outside of your control. What you do control is things like putting on a trade or not, how much do you buy, where do you exit, and how much you sell or buy during the duration of the trade. All of these components should make up your final evaluation of the trade.
If you enter a trade outside of your rules, via FOMO, chasing, etc, then it’s obviously a bad trade (even if it has a good outcome, for example). At the end of the day you have to decide how you will score your trades and I will show you what I do, and how it helps.
Initial Grading Process
Initially I used to grade my trades based on a somewhat arbitrary zero to ten grading system. The points were assigned somewhat arbitrarily. What’s a difference between 7 and 8? I didn’t really know, to be honest. And I didn’t use any kind of analysis of my trades during my reviews. I had a hunch that I should grade my trades, but still wasn’t sure what’s the best way to go about it.
A-B-C grading system
I found a solution to this conundrum via a trading psychology seminar I took with Jared Tendler. He mentioned how when he works as a coach he suggests for his trainees to start grading themselves in three grades, A — B — C and then try to advance all of your trades where your A trades get more impressive where you focus on increasing your profits. Or C trades, the big mistakes you make (e.g. FOMO, chasing, cutting your winners short, etc), get progressively better where you no longer make FOMO mistakes for instance and C becomes grades where you don’t close it out properly. He talks about this system more here: https://jaredtendler.com/the-inchworm-concept/
Anyway, I really liked it. Keep it simple, stupid, as they say: A — B — C. With the new grading system in place, at the end of each week I went through the closed out trades and tried to be as objective as possible. I would look over my notes on entry, on exits, look at the chart at the time of the entry, step through each day, and basically relive the position and assign myself a grade and a reason for that grade.
What to do with grades
Once I had enough grades assembled, I could then narrow my focus. This is where the “A-B-C” concept is powerful. You can now ask powerful questions with this system in place. For example, you can ask, what is common to all my C trades? And the answer will give you a list of mistakes you make over and over again. Once you have the list of mistakes — work on eliminating them!
You can ask, what would it take to turn Bs into As? And soon you might identify the tendencies you have, like taking too much early profits, or you are messing with stops too much, etc.
You can focus on eliminating Cs, or turning more Bs into As, or you can focus on making As larger profit wise. You now have choices and a way forward.
In my case, my first step was eliminating as many Cs as I could. This turned to me writing down all the common mistakes I made, reviewing those mistakes before each trading week and just like that — a lot of those mistakes went away and didn’t appear in my logs.
I kept my profit taking approach the same and fully focused on eliminating C trades. Soon I found myself NOT taking trades because they had all the signs of my “C trade” behavior. Soon I found myself doing things that were in the moment uncomfortable, but the right thing to do. I had mental reminders “hey, what you are thinking of doing here usually leads to C, don’t do it”.
Impact on profits
This approach had a profound impact on my equity curve. My drawdowns reduced significantly and the curve sort of normalized and was tracking upwards vs before I was a bit more volatile and all over the place.
The biggest benefit was getting a handle on the mistakes. This has provided a framework for mistake capture. I review my trades regularly and at times can step back and compare even years worth of trades and see which way my C trades are trending. Just looking at C trades regularly reminds me of the mistakes I make, or new mistakes I am starting to make and that serves as a signal to put steps in place to prevent those mistakes from happening.
It has gotten to the point where now the mistake trades are not that numerous and I am more focusing on creating more A trades. Making my A trades bigger, and turning Bs into As.
Track and Review Are a Must
You must keep notes on your trades. You must go over those trades and review. And, when you review, make sure the reviews are useful and you are not just doing this for the sake of doing it. Add grades. Then analyze. What is common with A trades? What is common with C trades? Can Bs be turned into As? You can start digging and working on concrete steps you can take to get your performance moving forward.
