6 Ways To Make Better Smaller Decisions

Trading is about making thousands of small decisions.  None of these decisions have to be all that great, so long as no one decision ever destroys your career.  Traders require a mental suppleness to make so many decisions.  I find that slicing up large decisions into manageable choices is what facilitates a state of flow where I can effortlessly and decisively make one decision after another.  Maintaining this flow is important to properly process the large body of information coming at you all day.  Many people perceive that you must fight to win in the market.  If you fight with the market you are simply fighting with yourself.  Choose the path of least resistance.

No one decision or information packet should require too much processing.  If decisions require too much effort because of size or complexity, they will block the flow.  When you allow yourself to become blocked you can become stagnant and easily slip into a defensive state of mind which makes it difficult to make correct decisions in a timely manner.  Decisions will start to pile up and next thing you know, you’re fighting.

The end goal here is to be able to rationally see when a position is not working and to exit winning trades before the music stops.  If you force yourself into making binary decisions that are few and far between then you are going to be too emotional or too out of practice when it comes time to take action.  Make more decisions more often.

Here are some rules when you are faced with big decisions in trading:

1) Consider the probable situations in advance.  Then divide all big decisions into five smaller choices; two of which will always be: 1) do nothing, and 2) increase your bet.

If you have multiple actionable choices you are less likely to find yourself in a situation where you puke your whole position at the worst possible time or hold on to a position past its due date.  Developing a way to systematically reduce risk as positions are not working and increase your risk as they are going your way will drastically reduce your tendency to sell at the low and buy at the high.

2) Parameterize each choice with quantitative action points rather than emotional ones.

Decision points should be obvious, easy to identify, and have nothing to do with the way you are feeling about your position.  Think about your current view in the short, medium, and long term and whether your portfolio reflects that view.  Think about your position sizing relative to your account size and your expected value in the short, medium and long term.  Identify price action scenarios that will get you a successful exit regardless of PnL.

3) Ensure that at least one choice is based on something other than price.

Traders are often so focused on their stop price that they can miss the forest for the trees.  Pay attention to the the big picture because there are often signs that can get you out at better prices than stops alone.  Find something that correlates well with the asset you are trading and use that as your guide post.  Look for evidence of being in consensus or crowded trades.  Take a look at the date: are you close to earnings and what is your edge going into earnings?

4) Never make your choices so small that they are inconsequential.

If you have a 20,000 share position and you sell 100, you shouldn’t be patting yourself on the back.  You didn’t make a decision — you’re just fooling yourself.

5) Be flexible and committed.

Trading isn’t the place to be a hero or prove yourself.  It’s also not the place to be a total wuss.  Positions will go against you all the time and this is a normal part of the business of trading.  Always make sure that you are not trading so large that you have no margin for error.

6) Wave the magic wand.

When you got into the trade, you had clear vision of what the trade would do.  This has nothing to do with reality, this is just what you thought the trade would do if you could wave your magic wand — it’s the picture of your trade you created in your mind.  If the trade doesn’t do what your magic wand thought it would do, maybe it’s a good time to make a small decision and adjust your position size back to reality.


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