Difference between process and strategy.

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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  • Prospectus

    Can you give an example of a strategy and a process? I’m having trouble seeing the distinction.

    • Process is everything that happens before, during and after a trade.  The way in which you get information and use the information to execute.  Strategy is the reason for the trade.  

  • Thanks, Eli. I’ll owe you a beer for so promptly getting to my question.

  • There are traders that may have a good strategy, but without good process its impossible to succeed. I look at process through the lens of self-management. For example, when we’re able to focus on DOING the right thing as opposed to BEING right, that is an example of a process focus (as opposed to an outcome focus – “my strategy better work”).

    There are so many things outside of our control in trading, like what the market is doing; but the one thing we do control, or we should be controlling, is the process. In fact, I would say it’s almost all about the process. I’ve seen too many traders held back who have a good strategy or good understanding of the market but lack a good process…..which often manifests as execution issues – impulsive, hesitation, etc.

    • Yep, I think it is also a psychological thing in that when you get it perfect and you miss it is only yourself to blame.  Scary realization. 

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  • Mark B

    Well, I almost agree, but just almost.  Or, I think I agree with your overall idea, but I strongly disagree with your statement that “strategy is the least important part of trading”.  To me, strategy is nearly as important as process (and risk management is a part of my process),  but it’s not a matter of which is more important but which must come first.  

    With traders, as with anyone involved in a performance activity (athletes, surgeons, musicians, etc.), the process part must come first.  Process is the precursor to strategy that gives you the ability to consistently act/react in the best possible way given the situation.  I’ll give a baseball example:Process:   Keep the bat off your shoulder, keep your right elbow up, keep your head down, use a level swing, eyes on the ball all the way, step into the pitch, rotate your shoulders and turn your hips.  And, most importantly, practice all of this over and over again until it becomes part of you.  These are constants that need to become unconscious, to exist in the realm of muscle memory.Strategy:   No outs and a runner on second.  You want to hit the ball hard to right field, over the first/second baseman’s head, to get that runner to third with one out, worst case.  Hitting a grounder right to the shortstop will only result in an out with the runner still on second (technically speaking, this is more tactics than strategy, but it still works as an example).  In the example above, your team might still win this one game without a good strategy if you and your teammates have good process.  Maybe your pitcher throws a shutout, or you whack the ball over the left field fence.  But your team will probably be sitting at home when the playoffs start.  In the same way, if you have good overall process you might have some small success as a trader, as long as the market doesn’t evolve into a different animal than the one you initially learned to trade.  Imagine, for example, someone who started trading in August of 2010.  Now, imagine that person trading from July through November of 2011.  If he didn’t adapt his strategy to the conditions, he might be a former trader at this point. I’ll agree, though, that you can forget strategy if you haven’t first gotten your process down.  That would be like knowing that you need to hit a fly ball to right field but not being able to hit major league pitching.  So, yes, process is probably somewhat more important, but at the end of the day it’s really a moot point because trading is so challenging that you really need all facets of your game to be the best they can be in order to be successful.

    My favorite writer on the subject is Dr. Brett Steenbarger.  His books and blog, (Traderfeed) focus on trading as a performance activity, and I don’t believe a person can find a better resource on this topic anywhere on the internet (and it’s free).  He has moved on and no longer updates his blog, but he has left his wonderful archive of information intact.

    • I responded to you in this post. http://traderhabits.com/?p=4953

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  • Winston Nilumol

    I have no idea how I managed to stumble across your site. Anyway, being a novice trader I feel that having a strategy you believe in and understand makes it that much easier to execute your process. If you don’t have a fundamental understanding of your strategy, no matter how focused you are, when it comes down to the execution stage of your process, you might still be hesitant.

    I’m just starting out trading with two different scans and trying to just look at charts everyday, and learn as much as I can about the what is happening and why it’s happening. I guess you could say my process is still inefficient because I’m not quite sure what is important and what isn’t. 

    Just my two cents..

11 Responses to Difference between process and strategy.

  1. Prospectus says:

    Can you give an example of a strategy and a process? I’m having trouble seeing the distinction.

    • Eradke says:

      Process is everything that happens before, during and after a trade.  The way in which you get information and use the information to execute.  Strategy is the reason for the trade.  

  2. Thanks, Eli. I’ll owe you a beer for so promptly getting to my question.

  3. There are traders that may have a good strategy, but without good process its impossible to succeed. I look at process through the lens of self-management. For example, when we’re able to focus on DOING the right thing as opposed to BEING right, that is an example of a process focus (as opposed to an outcome focus – “my strategy better work”).

    There are so many things outside of our control in trading, like what the market is doing; but the one thing we do control, or we should be controlling, is the process. In fact, I would say it’s almost all about the process. I’ve seen too many traders held back who have a good strategy or good understanding of the market but lack a good process…..which often manifests as execution issues – impulsive, hesitation, etc.

    • Eradke says:

      Yep, I think it is also a psychological thing in that when you get it perfect and you miss it is only yourself to blame.  Scary realization. 

  4. […] Difference between Process & Strategy from @eradke […]

  5. Mark B says:

    Well, I almost agree, but just almost.  Or, I think I agree with your overall idea, but I strongly disagree with your statement that “strategy is the least important part of trading”.  To me, strategy is nearly as important as process (and risk management is a part of my process),  but it’s not a matter of which is more important but which must come first.  

    With traders, as with anyone involved in a performance activity (athletes, surgeons, musicians, etc.), the process part must come first.  Process is the precursor to strategy that gives you the ability to consistently act/react in the best possible way given the situation.  I’ll give a baseball example:Process:   Keep the bat off your shoulder, keep your right elbow up, keep your head down, use a level swing, eyes on the ball all the way, step into the pitch, rotate your shoulders and turn your hips.  And, most importantly, practice all of this over and over again until it becomes part of you.  These are constants that need to become unconscious, to exist in the realm of muscle memory.Strategy:   No outs and a runner on second.  You want to hit the ball hard to right field, over the first/second baseman’s head, to get that runner to third with one out, worst case.  Hitting a grounder right to the shortstop will only result in an out with the runner still on second (technically speaking, this is more tactics than strategy, but it still works as an example).  In the example above, your team might still win this one game without a good strategy if you and your teammates have good process.  Maybe your pitcher throws a shutout, or you whack the ball over the left field fence.  But your team will probably be sitting at home when the playoffs start.  In the same way, if you have good overall process you might have some small success as a trader, as long as the market doesn’t evolve into a different animal than the one you initially learned to trade.  Imagine, for example, someone who started trading in August of 2010.  Now, imagine that person trading from July through November of 2011.  If he didn’t adapt his strategy to the conditions, he might be a former trader at this point. I’ll agree, though, that you can forget strategy if you haven’t first gotten your process down.  That would be like knowing that you need to hit a fly ball to right field but not being able to hit major league pitching.  So, yes, process is probably somewhat more important, but at the end of the day it’s really a moot point because trading is so challenging that you really need all facets of your game to be the best they can be in order to be successful.

    My favorite writer on the subject is Dr. Brett Steenbarger.  His books and blog, (Traderfeed) focus on trading as a performance activity, and I don’t believe a person can find a better resource on this topic anywhere on the internet (and it’s free).  He has moved on and no longer updates his blog, but he has left his wonderful archive of information intact.

  6. […] Nothing is more beneficial to a writer than to get thoughtful response from a reader.  It stretches your brain and helps to cover up any holes in your explanation.  This is from the comment section of The difference between strategy and process.  […]

  7. Winston Nilumol says:

    I have no idea how I managed to stumble across your site. Anyway, being a novice trader I feel that having a strategy you believe in and understand makes it that much easier to execute your process. If you don’t have a fundamental understanding of your strategy, no matter how focused you are, when it comes down to the execution stage of your process, you might still be hesitant.

    I’m just starting out trading with two different scans and trying to just look at charts everyday, and learn as much as I can about the what is happening and why it’s happening. I guess you could say my process is still inefficient because I’m not quite sure what is important and what isn’t. 

    Just my two cents..

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