The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success

4.11. IDEA TIMING

Perhaps the most difficult aspect of developing an expectational analysis is looking for a timeline. Nevertheless, if you can quantify the amount of time you expect it will take to reach the upsides and downsides of your trade, you will be better equipped to manage the risk effectively.

Although there is no "right" way to make money, the best approach is one in which investment style and investment horizon are agnostic and where ideas are evaluated with different investment time horizons by calculating their time-adjusted expected value, which probability weights the upside and the downside, and the timing of the upside/downside. Goal-setting is important in that it helps relate the portfolio return objectives to the targeted rate of return for the ideas.

You can maximize capital efficiency by increasing positions only when there is an expectation of realization. Ask yourself, "When is the probability of being proven right or wrong the highest?" You can help answer this question by measuring the holding period, the winning percentage, and win–loss ratio. These provide insight into your efficiency at balancing idea selection with the timing of the capital commitment to the idea.