Seeking Better Trading Efficiency in Today’s Markets


Even during bull markets like the one we are in now, where we are at all-time highs, doing well requires that we manage our positions effectively and seek efficiency.

Efficiency isn’t really a word that is used very much by traders and certainly is a concept that is pretty foreign to investors. The way most people invest completely neglects looking at efficiency in fact and the hope is that regardless of how inefficient our approach is, we’ll make money over time due to the overall upward bias of stocks.

Traders have to be more aware of their efficiency as an inefficient trading system will simply lose money. There are plenty of those traders out there though and not striving to be efficient can be said to not only be the biggest cause of failure but the only one.

If we are trading efficiently, or investing efficiently for that matter, we will have plenty of trades that don’t work out but we will be profitable over time. We can say this with complete confidence because there are biases that exist, and while we’ll never be able to capture all of the money that can be made trading these biases, being efficient means capturing a good part of it which leads to a net profit.

The starting point for looking at efficiency and trading efficiently is to look back at past data to how we may have traded to maximize profit. This should be the starting point of any budding trader or investor, although this is not how people approach this and will instead seek to impose their own ideas upon the market and test those out.

If we are good at this, we may still make money, but we may not be that efficient and actually won’t even have much of an idea how inefficient we may be. The single most important lesson for anyone looking to make money from markets is to derive your trading strategies not externally like just about everyone does, but internally.

An example of an external design would be someone who takes an indicator such as a simple moving average and looks to apply that to trading. Perhaps they read that a certain moving average tends to work and they apply that to their trading and hope that things will work out. Perhaps they discover some adjustments that seem to help, like changing the period of the moving average, using a different type like an exponential moving average, using some sort of crossover, and so on, and this might improve their results but the efficiency that is being strived for is within the system, which isn’t what we should be shooting for really.

There is always a lot of trial and error whenever we look to put together any trading strategy, so that’s quite normal, but we really want to be using the data itself as a reference point and not a particular way to manage it like these moving averages. In a nutshell, our primary focus needs to be not to make a particular trading strategy more efficient, although that does help, it needs to be on making our trading more efficient period.

Ideally, what we should be doing is looking at the chart data and asking ourselves what we could be doing to get the most out of the movements in price that have manifested. There are no shortcuts here and we’re going to have to do the work, but what we are looking for is emerging patterns that our charts provide us rather than trying to impose our patterns upon charts.

We might think that we need some sort of advanced knowledge or skill to do this, to start with this view, but this is the superior approach regardless of how advanced your trading skills may be. Even if we’re looking at our first chart ever, this is the way we need to be looking at them, seeing all those squiggly lines and thinking about how we might make money from such a thing.

All of our trading takes place on the right edge of the chart of course, so we don’t get to travel back into the past and place trades, but this is all about discovering patterns that have occurred in the past that can be relied on with a statistical edge in the future, and that completely describes the exercise of using charts to trade in fact.

Letting the Charts Decide How to Trade Them Best

The difference between letting our charts tell us how we should be trading instead of just reading some things in a book is a big one indeed. This opens up all possibilities toward being more efficient instead of just limiting ourselves to tweaking a strategy we just picked out of personal preference and trying to make that more efficient.

Even some very profitable traders can trade far less than optimally overall, and when we put on these glasses and look at the way even some successful traders trade, even those who have considerably less experience may be able to spot some real mistakes. Once we find something that works though, we can get pretty comfortable with it and it also makes money then we can become pretty complacent. We may also have some goals that become reached and get happy with that, and also have some limiting beliefs about what sort of returns a good trader can achieve and let that limit our passion for seeking higher ones.

We may decide that we’ve revised our trading system enough once we get it to a certain point, or if we revise it, we tend to do so within the chosen system, for instance adding another indicator to further refine our entries and exits with it, and get happy enough from this.

This leaves out questions such as how we may have been able to get better results, and this not only may allow us to refine our system but may also provide us insight into what else we may have done instead to become more efficient, and this may involve revamping our current trading strategy entirely.

This applies to investing as well, as investing with a view towards efficiency is simply trading done on longer timeframes. Few investors seek to become efficient though and many even have the idea that these things are somehow all random or at least cannot be predicted to there’s no use trying and this leaves us relying solely on the strategy of just crossing our fingers and hoping for the best.

That might be more efficient than putting all of your money on the short side instead and hoping, like we do on the long side, but that’s about it. Given that there is at least a positive expectancy overall with the long side with stocks, it’s more efficient than not investing at all, but since the goal presumably is to seek to achieve good returns, we need to put that desire into action somehow.

What we see when we look at a chart is trends. We can see that stocks do move in trends, and this is even more evident when we use Heiken Ashi bars instead of candlesticks or other types of bars. This is not just a matter of using Heiken Ashi bars to trade, although you certainly can, this is also about filtering out the excess noise that other charting bars produce.

We Want an Edge, But We Should Want More of an Edge

The goal here isn’t to find some holy grail that works all the time or almost all of the time, as this doesn’t exist, but something that can produce edges over time by being more right than wrong and delivering more profit than losses. The more we get over random, the bigger our edge, and we indeed should be seeking bigger edges when possible.

Seeking efficiency is really about comparing different approaches and choosing the right one. An example would be taking a long position in a major index 10 years ago and holding it all the while, or looking to time this long-term move in various ways that would produce greater gains and also manage our risk better.

The relationship between holding time and risk is actually a proportional one, even though most people think the opposite for some reason, although that reason isn’t even clear. Perhaps it’s all the people that tell them that timing markets, which seek to reduce risk, is somehow riskier than ignoring risks completely and therefore being exposed to all of them in full measure.

We can manage risk with long-term positions as well, and we need to be really, but with these positions, we will need to build in a higher risk tolerance or we simply won’t be staying in them for long, because there will be storms along the way that we will have to ride out. On the other end of the scale, we might be trading very short-term positions where if there is a hint of a cloud in the sky we’re out of the trade, which will obviously produce much smaller losses than riding down bear markets will.

There are two forms of risk that need to be distinguished, although both involve drawdown risk. A given trade may expose us to more or less drawdown risk, losses measured as a percentage of our account balance. Our trading system also has drawdown risk, where we might lose only a little per trade but most of our trades end up being losers and this in itself can wipe us out over time if we continue to trade badly.

If we’re not trading well though, we have no business trading real money at least, so once we have achieved profitability, the task then becomes to strive to be more efficient, to extract more out of our charts. Price bounces up and down a lot and also moves in trends of various lengths and in both directions, and we can even call sideways a direction if it is persistent. We may not be making or losing much in a sideways trade but we might be able to do better in something else that is actually moving, so this direction does matter as well with regard to striving to trade more efficiently.

Once we’ve come up with a plan to identify trends generally, which once again is best derived by letting the charts speak to us rather than us trying to order them around and find that they often do not obey us so well, then we need to decide on our scope.

We’re at a time with the stock market that all scopes are bullish, whether that be the 10-year bull trend we’re in, 2019, since the beginning of June, this week, Wednesday’s trading, the last hour of trading Wednesday, or the last 5 minutes of it. This all involves different scopes that people use, and while there are both practical considerations as well as matters of preference that define these, we need to seek to be efficient in whatever our chosen trading scope.

The entry pass to this is just asking yourself how you could be doing things differently, and then take whatever ideas that emerge and look to see if they indeed offer an improvement over what you are doing now. This is how we get better, as we need to first ask in order to receive.

Andrew Liu


Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

Areas of interest: News & updates from the Consumer Financial Protection Bureau, Trading, Cryptocurrency, Portfolio Management & more.