Chances are you’ve heard of the concept of risk-adjusted returns.

If you haven’t, it basically means that a strategy’s returns should be measured relative to the risk taken to achieve them. There’s a handful of ways to grade the efficiency of trading systems in this category such as Sharpe, Sortino, MAR, Ulcer index, and the list goes on.

Let’s say you have a strategy that can return 50% a year but there is a meaningful probability the strategy can blow up and go to zero. Depending on the likelihood of each of those outcomes that may or may not be a system worth trading.

Maximizing risk-adjusted returns is something we should be all optimizing for as traders.

In this article, I want to challenge you to take things one step further. 

Not only should we all be striving to produce strong risk-adjusted returns, but we should be mindful and honest about the time and hours spent achieving those returns.

Let’s say you do come up with a method of generating strong, reliable, and persistent risk-adjusted returns. Now the question becomes, how much time do you need to invest to hit those goals? Is it 10 hours a week or is it 40 hours a week? 

If it’s 40 hours a week, and you’re only eeking out a slightly better return than a 60/40 portfolio, is your invested time worth it? There’s obviously no universal right or wrong answer for everyone, but I think it’s a worthwhile thought experiment to ask yourself. 

For the past several years, I’ve been fascinated with this equation and continue to think carefully about how much time I personally spend for each additional per unit of risk-adjusted return.

Here’s what I’ve learned so far and some of the steps I’ve taken to optimize my own trading. 

Automation and technology

Automation is a buzz word right now.

It’s here to take our jobs. It’s turning us into zombies. It’s ruining this, that, and the other thing.

We hear criticisms like this every day about automation, but as traders, it’s never been a better time to be a do-it-yourself investor. We should be embracing automation and using it to systematize our processes and make our lives more efficient.

Any repeatable decision that you make on a daily basis should aim to be automated. 

When I use the word automation throughout this article I’m referring to either fully or semi-automated processes, or in other words, highly leveraging the use of tools and technology. 

This does require you to have well-defined rules, categories, patterns, for whatever that task is, and it’s worth spending time to think about writing those rules out. Not sure what you should automate? Keep reading, we’ll discuss examples. 

Scanning for trade setups

This is an easy place to start incorporating some automation into your trading process and my guess is most traders reading right now are already doing some form of this. Trade setups quickly blend into underlying trading strategy rules which I don’t want to get deep into because everyone reading will have vastly different strategies; however, every one of us has a unique set of criteria or “ideal setup” for the type of stocks we want to trade.

Take for instance a trader who specializes in breakouts. Breakout traders typically like stocks that are already in established uptrends and perhaps have recently began consolidating sideways in a range. The goal of this breakout trader should be to have scripts or processes that will go out there and scan the universe of stocks and bring back only the names that fit the technical pattern the breakout trader is looking for. 

Example from The Trade Risk’s Fresh 10 Day Breakout scan

How crazy would it be to just open a list of publicly available companies every day, start with the ticker symbols “A” and go right down the list until you hit ‘Z’s” looking for the right breakout setups? It’d be wildly inefficient and totally unnecessary given the tools and software we have available.

Some would argue that looking through a large list of stocks the manual way will give you a better “feel” for the market, and that may be true, and if that’s your edge, then keep it up! But that’s a debate for another article. 

The key takeaway is that the trader should not be spending time and mental energy to do a repeatable task such as finding setups. This should be done for you so you can focus on your unique edge, the things that can’t be programmed into a computer. 

Sites and software to scan for stocks

• Worden TC2000
• Finviz.com
• StockCharts
• MorningStar
• MarketWatch
• MarketSmith
• Your broker
• Excel

Measuring the Market Environment

Next up on the automation list is keeping a pulse on the market environment. We all want to know what the broad market is doing, and for good reason. Most stocks follow the general trend and temperament of the major indices.

So ask yourself, what is your definition of the ideal market environment? 

Technicians will measure things like: trend, growth appetite, breadth, volatility, sentiment indicators, etc. 

Fundamentals investors might consider things like earnings growth, economic indicators, yield curve, etc.  

Regardless of how you trade, chances are you have a set “go-to” list of criteria you’re looking at. So the question becomes, can you automate the analysis of that criteria?

At the Trade Risk, we created something called a Market Health Dashboard. It looks at three factors that we consider important and meaningful for our trading strategies:

• Trend
• Momentum
• Breadth

The Market Health Dashboard measures and computes a final health score that is used as an input into some of our trading systems. This saves a lot of repetitive time waking up every morning checking in on the same old indices and studies and manually putting together the pieces of the puzzle.  

Trade Management

Every time you place a trade, you’re eventually going to need to manage that position, hopefully for better rather than for worse.

Automating this decision-making can do wonders for both your PNL and your mental sanity. Once a trade is on, emotions and biases are running at their highest, which ultimately leads to more mistakes and irrational behavior for the manual trader. 

Having a plan in place ahead of time, ideally automated, will help solve and streamline potential issues. 

Here are a couple of tips on how you can go about doing this:

• Place your stop loss and target and walk away from the screens!
• Take advantage of your broker’s advanced or conditional order types: If…Then orders, automatic trailing stop losses, etc. 
• Leverage pre-built trading software solutions such as NinjaTrader’s Automated Trade Management solutions.

Automating the Entire Strategy

If you do manage to build out a concrete set of repeatable rules for all aspects of your strategy then you’re in a position to streamline and fully automate the whole process. Congrats! This is the ultimate win for maximizing your screen time adjusted returns. 

Let’s be clear, chances are you still won’t be able to jump on the next plane to Ibiza and forget about markets altogether. Most automated systems traders I know are still diligently keeping an eye on markets every day, making sure everything is running smoothly, and using their time to improve and research new ideas. 

One of the latest additions to our internal workflow here at the Trade Risk was building out a trading terminal for our Merlin strategy that pulls in live market data, manages all of our open positions, routes orders directly to our broker, and effectively manages a trade from start to finish without the need for us to interfere.  

We built this terminal in Microsoft Excel given the great visualization capabilities to display what’s going on with the strategy in realtime while also having a very capable back end infrastructure (Microsoft .Net framework) to code our system and manage data. 

Discretionary Traders 

This whole article may seem like we’re calling for the death of common sense and manual, intuitive trading, but that is not true. The underlying message is that we should identify all tasks and decision-making which repeats and does not require any secret-sauce value-add discretionary judgments to get right. 

If you possess an edge in looking through 500 stocks each weekend and gathering a feel for the market that you can then go on to translate into alpha, then you should continue to do that exercise! Do not automate it. 

Maybe you’re really good at picking entries but you’re horrible at trade management. You should continue to pick entries but then focus on automating the management of your portfolio. 

Everyone needs to reflect on their processes and strategy and figure out what pieces can be handed over to software and what needs to be retained to their personal judgment. Often times a hybrid approach can be quite effective. 

How to Maximize Your Screen Time Adjusted Returns

Hopefully after reading through some of the examples above you can see that maximizing your screen time adjusted returns isn’t just about limiting the time spent staring at screens. It’s about being a thoughtful and efficient trader regardless of how active you are.

Not only do many of these tips free up our time but they also save us from costly behavioral biases, human errors such as mistyping orders, or computing position sizes incorrectly, all of which have cost me money far more times than I care to admit. 

The takeaway once again is that we should strive to automate the trivial tasks and spend more time on meaningful creative endeavors.

Thanks for taking the time to read and good luck automating!