Luck Favors the Prepared

Louis Pasteur or Edna Mode

One of the benefits of working on a team — a good team — is picking up the habits of the people around you. This is one of the main reasons that the best investors and traders start their careers as an “institutional” trader rather than retail. It is not that the level of talent — goodness knows what high level trading talent exists in the world that remains untapped — rather that the process of trading is passed along after being honed for decades. Nor is this specific to finance. I’m currently finishing Anthony Bourdain’s Kitchen Confidential. He spends quite a bit of time on what makes an effective kitchen and how that culture gets inculcated into new generations of chefs. Yes, culture.

Culture is critical in trading. There is not a single culture across all successful trading firms. JPM is not like Susquehanna is not like PIMCO. There are multiple ways to succeed. Part of culture is developing a set of habits. For me, when I started on the Repo/Money Market Desk at JP Morgan so many years ago, I picked up the habit of putting together a daily sheet. The sheet had current market prices, economic data to be released today, and any relevant notes that may come in handy like customer interests or an upcoming Fed meeting.

My daily sheet is the equivalent of having a warm-up routine before a game or practice. It prepares me with the current state of the world, gives an ongoing mental database of market prices, and puts me in the proper frame of mind to address the day. These days, my daily sheet is oriented around digital assets and their derivatives. It includes current pricing, basis prices and yields, implied volatilities, money flows, and variables that give me the global macro backdrop.

In many ways, my daily sheet is like a checklist (but is not). There may be topics of the day that I need to find out about and research. But it gives me a map to chart my trading. My daily sheet reflects my view about what I need to know over a sustained period of time in order to keep a sense of value. If I did not have my own daily sheet, then I would be subject to the whims of new outlets or social media. A framework is a scaffolding onto which raw prices can be applied in order to make sense of the trading world. The daily sheet represents my framework, which, is an aggregation of simpler mental models.

The items on my daily sheet change over time. As an example, there is an evolution of money flows that I’ve been tracking. At first, I did not have any. Then, with the launch of the Bitcoin and then ETH ETFs in the US, I added those flows. Then I read about flows into stablecoins being, perhaps more important. I added USDT and USDC flows. Most recently, as crypto ETF flows appeared to be linked to basis trades, I began adding futures open interest changes. The point being is that the end goal of supplying your mental framework with data stays the same, the details evolve. Advanced tip: make sure pruning of non-helpful data occurs, too.

Above is the most current iteration of my daily sheet. I’ve added it to the repository. It incorporates price data, flows, and positions. This ensures that each day I start out by looking at all of the relevant data that I need. Further, I fill it out by hand. This may sound odd, but I do have tools with nearly all of this data updating in realtime. I could (almost) fill out the entire thing using software that I have written. Yet I choose not to. I believe that the combination of physical action of writing the language/numbers in coordination with thinking about them is more powerful for building that mental database, learning about the markets, and keeping things in mind during the day. My reading indicates that scientific research supports that finding. I’ll leave it as a DYOR for you, my reader.

I also have a separate checklist. For me, I have things on it like: check for meetings today, check margin at exchange accounts, do the daily worksheet, communicate with the team, write the morning commentary, post prices for customers, and so on. Most of the time, I do not need the list. I mean, I do these things every day. However, that does not matter. The point of a checklist is to never forget. And I can assure you that the most obvious — to check my schedule for meetings — is the one that I most frequently forget and that checklist saves me.

I’ve been doing this for a long time. As I said, I started by learning from others on the fixed income trading floor at JPM. I continue to this day if I am trading — whether quant or discretionary. It is fully a part of my process. I’m good at that. Let’s discuss some other routines that I’m less good (this is charitable) but that make for excellent culture. I write them here because I need to renovate my culture, even if it turns out to be a culture for one.

• Dedicate 30 minutes to reading academic papers (or equivalent) that may be helpful for idea generation for my trading

• Keep a trading journal

• Keep a decision journa

• Risk assessment process. Many might think of this as being VaR and that is fine. Okay it is not. My long time colleague, Paul Sacks, has a fantastic options risk assessment routine. He examines the position and asks what is a single trade fix that de-risks things. What is a two-leg option trade that de-risks things. And what is a three-leg option trade that de-risks. When things get hectic, especially as a market maker, having made that mental commitment in the morning means that one is ready to do the trade to get out. Plus, it really builds the mental muscle memory to figure that out on the fly.

• Scenario imagining. What I mean here is that, particularly as a team, come up with some interersting ideas about what may happen. Michael Lewis talks about it in Liar’s Poker. Is there some sort of an environment disaster? Will it impact food crops? Maybe supply chains? If X happens, then Y and Z will likely happen. How should we react? Particularly powerful with the aove risk assessment process.

This post is definitely a little less direct about immediate results to your trading. On the other hand, it should be a reminder that one must be prepared to create a set of habits that incubate success. I would greatly appreciate to hear from you if you have some ideas for habits/process of your own. Please reach out.

For the clip from the Incredibles, see here.