The Business of Trading
The Business Plan
Trading is a business. As in any other business, a well thought-out plan can make the difference between success and failure. Most businesses need a plan to motivate and coordinate employees, drive a marketing strategy or rationalize costs. Traders work alone, and so do not need to deal with many of the organizational issues confronting other managers. But traders need a business plan as much as any other business.
A business plan is a pact you make with yourself. It is your personal blueprint for success. It must include not only your goals but must also detail how you plan to achieve them. A business plan is more than a trading plan. Your business plan should go beyond the details of your trading methodology. It should include how you will structure your trading environment–and that environment pervades the whole of your life.
Your mind and your psyche are your main trading assets. How do you plan to protect them throughout the year? How will you detect and guard against burnout? When and for how long will you take a vacation? What is your plan in the event of an unusually large drawdown? Are there factors outside your trading which exert an undue influence on you emotionally? How do you plan to deal with them? Emotional decisions are the most destructive factor to the bottom line. Your business plan is your protection to guard against these!
Setting Goals
How do you quantify your goals, and how do you plan to monitor them? Goals are short-term targets which motivate us to achieve long-term success. To help motivate you, it’s a good idea to break long-term goals down to bite-size. Your business plan should be structured to motivate you to make higher highs in your account equity. This sounds like a given, but you must truly fight to come back from each drawdown.
Know what your equity high-water mark is. That high point is your next goal. Just as you swing trade the market’s price action by using short-term swing pivots, so must you be aware of these pivot points in your account. Monitoring drawdown levels should be at the heart of your money management. As long as your drawdowns are making higher lows in your account equity curve, you are doing OK! At the end of each trading day, determine your account equity. Your account equity curve is the foundation for goal setting, as well as the core of your money management strategy.
Your Trading Environment
It is important to have a separate office or private space where you will not be interrupted. Just as your analysis and preparation of a trading plan must be done free from outside influence or opinions, your trading environment should also be free from distractions.
A daily routine can have a steadying influence. Do your nightly homework at the same time and in the same place every day. Strive for consistency in every detail of your work.
If you trade actively during the day, it’s often not what you DO before the markets open . . . it’s what you DON’T do. Do not take distracting phone calls in the morning. Don’t get caught up in administrative details. If there are problems that can’t be avoided (computer, phone, out-trades, personal distractions), don’t trade! Be relaxed and ready to focus on the first fifteen minutes of price action, for this period often gives you the most clues about the type of day to come.
Every successful trader has his or her own rituals and routines. On the trading floor, some traders wear the same tie every single day. They take lunch at exactly the same time. They follow the same path to pick up their confirmation slips, get their cup of coffee, or grab a donut. Develop your own daily rituals. Ultimately, there is a freedom to be found in routine and ritual. They help free the mind for the business at hand and dampen self-talk (“what a dummy you were to take that trade!”) and doubt. Routine keeps one focused in the present and on the process. They add needed structure to an otherwise abstract environment. Rituals provide comfort, security, and help bring peace to the mind.
The Trading Plan
Develop a daily trading plan, and write it down! Do not put yourself in a position where you are reacting to the market’s movement. The process of writing things down can be critical to your success as a trader. It means, at the very least, that you took the time to think through and write down your plan. Keep a daily trading worksheet. Write down orders or trades for the next day. List any open positions and stop levels. Keep a record of your ticket numbers.
The first part of putting together your trading plan for the next trading day should be to assess the market’s volatility. Is volatility contracting as the market is beginning to consolidate after a large move? If so, then be prepared to trade off the short-term support and resistance as the market forms a trading range. On the other hand, if the price action has already contracted, there might be the potential for a breakout or trend day.
Is the next day a Triple Expiration? End of quarter? Pre-holiday environment? Is the market in the middle of a bullish momentum run? Bearish?
Decide the night before whether you are a buyer or seller. Are there important levels to watch? Do you have positions you should exit? Will it be helpful to get an opening call? Are there key reports or events, like FOMC meetings or earnings reports, that may lead to abnormal trading? conditions?
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