Anticipating the Market and Execution

I divide trading skills into two distinct elements: anticipating the market and execution. The anticipating part is reading the market, whether through charts, systems, technical indicators or intuition. Anticipating/reading the market is the trading skill that most of us focus all our energy on, and it is the subject covered by most trading books and seminars.

The execution part, meaning the actual trading part, is an often overlooked skill of trading. A good way to clarify the distinction between being able to anticipate the market and being able to effectively execute the trades is to describe the difference between the brokers and the locals on the floor of the exchange. (In Europe the floor no longer exists as all trading is now electronic).

Locals on the floor are independent traders trading for their own account (profit). Their motivation is (like ours) to make money and their preoccupation is (like ours) to be able to anticipate the market. The job of brokers on the floor is to execute orders from traders not on the floor. These orders may be from bank traders trading in an office or independent traders trading from home.

Ruthlessly efficient

Either way these orders are generated from somewhere 'off the floor' and they need to be executed 'on the floor' by a broker. So what makes a good broker? Think about what you would want from a broker. You would want someone who executes your trades with the utmost efficiency i.e, no hesitating, no indecisiveness, no coyness.

A broker needs to be sharp and alert to what is happening in the market so that they are always in a position to immediately execute any trade that they are given. A good floor broker is a joy to watch, they are ruthlessly efficient. They can go from idly chatting in a quiet market, to disseminating an endless flow of orders in a busy one.

Now imagine having to trade through a broker. What would it be like trading through a novice broker? Someone who doesn't know one end of an order from another. Not a pleasant prospect! Now imagine what it would be like trading with a highly skilled and experienced broker... Quite a different experience I think you will agree.

Anticipation and execution

Locals have to both anticipate the market and execute their own trades. If you think of all the possible combinations:

- Good anticipation / poor execution,
- Poor anticipation / poor execution,
- Good anticipation / good execution,
- Poor anticipation / good execution,

It is obvious which we would all rather be, good / good; but which combination would you say you are? I suspect there are a lot of good anticipation/poor execution traders out there who lose money despite their anticipation skills. So not only do we need good anticipation skills we also need good execution skills to succeed in trading. We need to develop the attitude of a broker when it comes to the task of actually executing our trades.

A broker is judged by his execution skills. It does not matter to a broker whether the trade he has just executed for a client is profitable or not. The broker, his boss and his client are only concerned with his ability to execute the trade efficiently.

So a broker gets to fulfill his need to be successful, to be a winner, by doing his job efficiently and effectively. That is all we can ask of a broker, it would be crazy to hold him responsible for the outcome of the trade. Going back to my earlier analogy of the trading floor, a local trader, on the other hand, is responsible for the outcome of his trades.

The local is trying to make money by anticipating the market. So a local has to decide whether it is a good time to buy or sell and then execute the trade. He is doing two things, deciding when to trade and then executing the trade. A local therefore has two aspects of his trading to judge, the accuracy of his market anticipation and the execution of his trades.

Poor execution or anticipation?

We know that trading is a numbers game, i.e. our success is not dependent on the outcome of the next trade; our success is dependent on the overall profitability of many trades. So while we are trading, whether the last trade we did was profitable or not is not important; there is no point drawing conclusions on the outcome of just one, or even a few trades.

We can only access our anticipation skills when we have made a reasonable number of trades and we can see the longer-term result of our actions. This contemplation is best made when we are not trading, when that markets are closed or when we are taking a break. When the markets are open and we are engaged in trading, the only thing it is appropriate to judge is our execution skill.

When we are trading our goal should be to focus on executing our trades with ruthless efficiency and to judge only that. If you consider the ways that you lose money trading, I think you will find that it is down to poor execution, rather than poor anticipation.

Appraise and amend

- You fail to place a stop loss according to your predetermined loss limits,
- You place a stop loss but then move it as the market approaches,
- You hesitate and miss an opportunity that you had clearly seen,
- You trade out of frustration or anger,
- You fail to use a trailing stop to protect your profit,
- You let a winning trade turn into a losing trade etc.

All the above (and there are more) fall into the category of poor execution rather than poor market anticipation. So if you want to turn your trading round, or make it more profitable, then cut out the above mistakes by focusing all your energy on executing your trades. Only judge yourself, when trading, on your execution. You can appraise and amend your strategy/approach when the markets are closed.

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