Difference between process and strategy.

This originally appeared in January 2012.

I received a comment asking me to explain the difference between process and strategy. If I could talk to myself 8 years ago I would have a conversation with myself about process vs strategy.  I would spend 95% of my time on process and 5% on strategy and as I got comfortable with the process I would flip it.  Process is very important in building a strong trading foundation.

Despite what every marketer of trading educator has ever told you, strategy is the least important part of trading. The exception being the risk management part of strategy.  What is always said is “every strategy works but not for everyone”.  I will be honest it took awhile for me to understand what this meant. I am not one for cliches but that one has significance.  It means that strategy is not the most important thing.  Your goal in trading every system/strategy is to out perform it. If that isn’t your goal you should probably just let an algo trade it.

The first step, assuming you have plan, to out perform a strategy is to have an extremely efficient process.

What a process provides:

Clearer mind:  There are many things in trading that are repetitive. Clean up as many as possible.  Find a better use of your time.  Traders are some of the hardest workers I know, they work long hours, but my question is why?  Think of it like making a phone call.  Some traders have to go to the bank to get quarters, then walk two blocks to a pay phone, call the operator for the phone number, and then make the phone call. Some traders hit one button and reach the person.  I am not saying you should not work hard, just work more efficiently.

Focus:  Once all of the little things are taken care of you can now focus on what is important, the market.  This will dramatically improve your execution. You can only execute well over time if it is you and the market. You can take more intelligent risks because you have more of the RIGHT information. Have you ever been in a trade, then when you go back to review a trade, you realize you missed something important? More than likely that is a process problem.  It is important to accurately attribute the importance of that information and realize that hindsight is a horrible recorder. I would rather make that decision when I can do something about it. This takes trial and error but a pattern will develop and once it does it is your responsibility to constantly monitor it for change.

Anticipation: Anticipation is key in trading because the market is always leaving cues to what it is going to do next or that what it is going to do next is not tradeable.  We teach our traders to have a progression, much like a quarterback would.  Anything can happen and having a progression will help you to take advantage of it.

This conversation I just had with you is the same conversation I wish I would have had with myself 8 years ago. Someone probably did but I didn’t believe them, you may be in that same boat. There is nothing sexy about cleaning up your process. You can’t see dollar signs in doing it like you can with getting the new strategy that is producing 86% win rate. (That will be the subject of an upcoming rant.)  Focusing on the process will eventually lead to a less cluttered mind, it will allow you to see the market in a way that you never have before.  You will see it in the way that many traders that are successful with trading different types of markets do.

If someone is trying to sell you a strategy without a process be very weary.

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