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From Discretionary Towards Systematic Part 2

By Dave Mabe

The other day I shared the email I got from Jack, a discretionary trader trying to get more systematic with his trading.

I shared a plan for improving his stock selection, but this time let's look at the rest of his process:

  • Holding trades "long enough"

  • Recognizing a setup's quality in real-time

  • Distinguishing between A+ setups to increase size in

When you consider these goals, you probably think that you can just get better over time by practice.

Practice makes perfect, right?

Just get in the reps by reading the tea leaves in each trade, and you'll magically get better through experience.

But there is a short cut for this.

Hint - it's something you better be already doing: keeping a trade journal.

Remember, a trade journal is not a diary where you're recording how you felt or what you ate that day and trying to correlate that with trading success.

A trade journal IS A BACKTEST, in a very real sense.

All your entries, all your exits, all the trades you took, and, importantly, WHY you took the trades.

This allows you to essentially backtest your discretionary trades.

What's even better is these are your actual fills - not theoretical ones like a normal simulated backtest.

You should be able to much more quickly get confident in how long you should be holding trades, simply by reviewing charts of the trades in your journal.

To determine A+ setups, here's what you can do:

  • Come up with a theory defining an A+ trade, say, High Relative Volume

  • Filter your journal based on that property

  • Tag those trades with a label like "A+ High RV"

  • Filter on that tag, view performance to test your theory in your journal

If you've been trading consistently and are reasonably organized, you can find your A+ setups quickly.

A trade journal is a goldmine, because you don't have to wait around for the "tea leaves" to become magically clear for you.

-Dave

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