Peak Performance Trading Tips

Jack Schwager's primary conclusion after writing the first two Market Wizard books is that great traders all have developed systems that fit who they are. I tend to agree that that's one of the secrets to success. Chapter 4 of the new edition of my book, Trade Your Way to Financial Freedom presents my revised 14 step model for designing a system that fits you. While I cannot do justice to the model in a short tip, what I can do is list some of the criteria you might want to think about in order to design a system that fits you.

Some of the criteria were mentioned in the last tip and I'll just add to that.

1. You need to know who you are. How can you design something that fits you if you really don't know who you are?

2. Once you know who you are, then you can determine what your objectives are and design a system to fit those objectives.

3. What are your beliefs about the big picture and to what extent must your system be able to fit your big picture beliefs. For example, if you believe that the U.S. dollar is doomed to collapse over the next 15-20 years, how would that affect your thoughts about developing a trading system.

4. You can only trade your beliefs about the market, so you need to understand what those beliefs are. What specifically do you believe about the market and how does that give you an edge? When you understand these criteria, then you can specifically design a system that you are comfortable.

Let's take a look at one example. Suppose you believe that markets are not really random because there are big trends in the market that don't fit the price movements you'd expect of random markets. You perhaps believe that the best way to make money in the markets is to find and capitalize on those trends. Now if this was your primary belief, do you think you could do the following?

• Buy things that were out of favor that nobody likes? Probably not because this doesn't fit the primary belief that you believe gives you an edge.
• Sell high and buy low, like a band trader is likely to do? Probably not because this is a very different mentality.

Now I could give lots of examples of beliefs and lots of examples of things that might be hard for you because they don't fit those beliefs. Hopefully, you've got the idea by now. You must determine what you believe about the markets that will give you an edge because you can only trade something easily that fits your beliefs.

5. Next you must understand the various parts of a system and the beliefs that you have about each of those parts. For example, what do you believe about setups, entry, stops, taking profits, position sizing etc. Again, you can only comfortably trade your beliefs

For example, suppose you want to catch trends, but you believe in tight stops. This means that you could easily get whipsawed in and out of trades a lot, but that when you do catch a big trend, your total reward will be many times your initial risk.

6. One of my beliefs is that a trading system is characterized by the distribution of R-multiples that it generates. (See prior tips for a discussion of what R-multiples are (or see the book). That distribution will have a mean and standard deviation that will tell you a lot about how easy it will be to trade. So you must decide what your system's R-multiple distribution must be like in order for you to be willing to trade it.

7. Another way of stating #5 is to ask yourself, "What criteria must my system meet in order for me to be able to comfortably trade it?" And while I can give you lots of suggestions, this is still a matter of personal comfort and a big part of developing a system that fits you.

8. You must also ask yourself, how can I use position sizing to meet my objectives and what is the probability, given the systems R-multiple distribution, that I will be able to do that. And if you have an accurate sample of R-multiples, then you can probably answer this question through simulations.

Lastly, you must ask yourself, what you will do to make sure your system fits all of these criteria well enough for you to be comfortable trading it. If it doesn't meet some of your criteria that well, what will you do to make it fit? Or will you change your criteria?