What matters more than your process?

So, we live in a world in which investors are nervous. Everyone knows the Fed is going to raise rates, it’s only a question of when and how much. Everyone knows that bond prices move inversely to rates, so higher rates will lead to lower bond futures prices. It’s only a matter of time, right? Well, no.

I’d take issue with every sentence I just wrote, except maybe the first one. (The idea that bond futures will move inversely to rates is particularly flawed, and if you trade bond futures you should know why. The CME publishes great material on this, and start with understanding the concept of “cheapest to deliver”.) However, we can’t deny that buying bond futures looks, to many people, like… well, for lack of a better word, a stupid trade. So why did I publish this chart and a long trade entry in bonds last Monday?

A long setup in 10 year note futures.
A long setup in 10 year note futures.

I look at that chart, and I see a decent trend and a real, but somewhat unclear setup. Given the narrative backdrop (i.e., how stupid I’ll look if I buy bonds and they go down like every knows (um… like everyone has “known” for five years?) they will, I might be hesitant to take that trade. Why do I do it anyway? The answer lies in process.

Process vs. a trading plan

Process has become something of a buzzword, but it’s a useful word. Process covers everything we do, and is a reminder to do those things consistently. If I have patterns or indicators or even a system, I might doubt it. I know they work more or less half the time, so maybe I should just skip this trade? It’s easy to think like that, but if I have a defined process, then I have a pretty simple job: I follow my process.

You need a trading plan, and I’ve written about that in detail before. A process goes beyond the plan, and covers every aspect of everything you do in relation to the markets. How do you do your homework? How do manage conflicts? How do you allow your actual trading plan to evolve? How do you evaluate your performance? How do you take care of yourself? How do you manage your process? A process covers all of this, and somewhere in your process should be the instruction to “follow the trading plan”.

Handling conflicts

It’s pretty common to see trades set up against the conventional wisdom. I might have looked silly shorting Gold and Silver in 2011, buying stocks in October 2014, shorting the EUR in 2014, or shorting crude earlier this year. Each of those trades would have been hard to defend on CNBC at the time, and it would have been easy to say, had they failed, “I should have seen ____.”

I think the best way to handle these conflicts is to think about narrative, news, and the conventional wisdom as a potential input to your process and plan. Is there some way you can measure the influence they would have on your trades, so we can know if it makes sense to pay attention to these things or not? If you can’t do that, then think about what you’re doing–you have a methodology for trading, and then you add this extra “thing”, this extra influence, at the end of the process. This extra thing hasn’t been measured, and you don’t understand it, so it’s just another degree of freedom.

Personally, my life quest seems to be to simplify and remove degrees of freedom; this is where I have found much of my edge. I’ve seen enough market action and have accepted that I can only see the future through a very cloudy cone of uncertainty and probability; the best guide I have is only a slight statistical tilt. All I can do, and all I need to do is to follow my process. What’s more import than my process? Nothing. How do we handle conflicts? Work the process.

Working your process

So, the short answer is that I can safely ignore narrative and news and what everyone else thinks and simply follow my process. As an aside, this means that I will be brilliantly contrarian at times, but I don’t actively seek to be a contrarian. (Doing that leads to things like being short stocks since 2010.) I’ll also be a brilliant trend follower at times, jumping on before everyone else sees the move and squeezing most of the juice out of the move. I know not to get too caught up on how “brilliant” I look, though, because I’ll look equally dumb at other times: I got ticked out of a copper short this week. I’ve been in many trades that almost immediately went against me. I’ve held trades for months only to scratch them against my trailing stop before the market finally exploded in my direction.

One of the deepest truths I know about trading this: you’re never as good as you feel on your best days. You’re not that smart. However, you’re also not nearly as bad as you feel on your worst days. The answer, as usual, lies somewhere in the middle, and in the middle, is process. Process is the hub that holds the wheel together. In a very real way, process is all that matters. Process is all there is.

Find your process.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.