Saturday, February 13, 2010

Prioritizing Trading Skills

Last weekend I wrote about taking an inventory of our trading skills and my belief that how we prioritize them can make a substantial difference in our trading results. The list I included was as follows:

a. knowledge of and ability to use various orders
b. technical knowledge and abilities
c. understanding and using fundamentals
d. utilizing reward to risk potential
e. finding candidates to trade
f. entry decisions and strategies
g. exit strategy
h. devotion to continuing education
i. ability to discipline one's trading
j. money management
k. having a plan in general and for each trade
l. knowledge of and ability to use various strategies

I suggested that you might want to see how you would prioritize the list ideally and how you have prioritized it in actuality in your trading. I'm guessing the exercise might have been at least somewhat useful in gaining some insight into your own trading personality.

It seems fairly clear to me that the trader whose first priorities are:

Understanding and using fundamentals
Finding candidates to trade
Entry decisions and strategies

might have vastly different results from a trader whose first priorities are:

Having a plan in general and for each trade
Ability to discipline one's trading
Exit strategy
Utilizing reward to risk potential

Doubtlessly, each of the skills in the overall list are important to at least some degree. As a trader, I am convinced that certain of those skills must be utilized and in terms of priority fall on the same critical level for me. They are as follows:

Highest Level of My Priorities
- Having a plan in general and for each trade
- The ability to discipline my trading
- Money management
- Exit strategy
- Using reward to risk potential
- Devotion to continuing education

Next Level
- Technical knowledge and ability to use as discipline
- Knowledge of and ability to use various strategies
- Knowledge of and ability to use various orders

Final Level
- Entry decisions and strategies
- Finding candidates to trade
- Understanding and using fundamentals

In my books and in my personal coaching, I discuss these skills and illustrate what I consider to be the relative importance of each. Why, for example, would I suggest it is more important to use a minimum reward to risk potential than it is to find a candidate? Why is exit strategy more important to me than my entry?

Obviously, minds may differ on the priorities given to these different skills and I can't say there is some "best" answer as to how to set these priorities. I can only say I think some line-ups are better than others. Throughout the year, I expect I'll return to at least some of the individual skills I've touched on here and attempt to develop a more detailed picture of the value and importance of various of these skills.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

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~ Nona said...

The penny dropped for me about having a near, clear exit for each trade several weeks after my coaching session with you. Just that awareness has kept me out of trades (no near, clear exit) or patiently waiting for something to move to a position in which my trade requirements were met along with, of course, the near, clear exit.

Thank you for listing your priorities. They're useful for all of us to review and consider.

Anonymous said...


Great pair of articles! Clearly, you have deep insight into trading. Here's one other skill a trader should have:

"Ability to measure and monitor their portfolio market risk and adjust their trading strategies to be compatible with their existing risk in light of existing market conditions."

For example, a trader with a portfolio of individual stocks or stock mutual funds shouldn't aggressively be a buyer of call options under most market conditions.

Bill M., trader

Bill Kraft, said...

Thanks for writing, Nona. I'm glad the information, both in the article and in our coaching, has been helpful. Hope all is well with you otherwise, too.
Bill Kraft

Bill Kraft, said...

Thanks, Bill. One of the reasons I wrote "Trade Your Way to Wealth" was to help traders come to an understanding of risk and various ways in which it may be reduced and in some cases even essentially eliminated.
Bill Kraft

Guillermo A Velasco said...

Very good article. What I struggle with is the exit strategy: how to identify it while in the up trend, when to exit in the down trend. I found myself exiting on rebounds (i.e. taking losses that could have recovered) and staying longer, therefore taking more losses.

A light in this would be helpful for me.


Bill Kraft, said...

Thanks for writing, Guillermo. I am a firm believer in having my initial exit strategy in place before ever entering a position. There are many ways one can form a strategy, but just to mention one example here, suppose I am considering buying a stock. I would be looking for something that appears to be bullish so I might enter on a close just above the 40 day (or 10 day, or 20 day, or whatever) moving average and my exit strategy might then be to close the position on a break back below the same moving average. In individual coaching sessions we frequently go over 10 or 20 ways to set up an initial entry considering the exit strategy at the same time. Hope that is helpful in giving you some idea of at least one approach.
Bill Kraft