Business Planning

 

The market does not owe you or anyone else great riches. The market does, however, occasionally tease a large number of people with seemingly easy gains (during bubbles and other manias), only to take them away again.

 

If you're serious about being a good trader, you need to approach the practice of trading with the same amount of effort you'd apply to learning any high-level endeavor.

VanBP
Business Planning

When people choose to trade the markets, they always want to rush in and get started straight away. They foolishly think they are going to miss the next “big wave.” But the market doesn’t know when you get in or when you get out. So don’t be foolish; take the time to plan.—Mel

Treat Your Trading Like a Business!

 

The entry price to being a trader or investor is fairly low. All you need is enough money to open an account. Your broker doesn’t care whether you understand expectancy or objectives. Your broker doesn’t care whether you understand that position sizing is the key to meeting your objectives. And your broker certainly doesn’t care that you must have your personal psychology in order for any of this to matter.

 

Your broker cares about two things:

  • That you have enough money to open an account, and
  • That you don’t lose many times the value of your account so that the broker gets in trouble.

That’s it!

 

You can easily open an account without knowing the first thing about trading.

 

Is this true of other professions? Can you become an engineer without understanding calculus? Can you become a doctor without going to medical school? Can you be an attorney without passing the bar? Of course not.

 

Similarly, could you play golf against a pro and expect to win if you'd never before stepped on a golf course? Would you compete in a chess tournament against a master player if you’d never played before? Obviously not, but even if you did, the worst that would happen is that you'd lose a few games (and perhaps a measure of pride).

 

But what do people lose in the markets? Anything from a few dollars to their life savings, and yet there are no rules about who should or shouldn’t be in the markets.

 

Day in, day out, people jump into the markets recklessly, without experience, without training, and most definitely without any type of formal plan. In fact, your broker may not even know the real nuances and fundamentals of safe and profitable trading herself. In fact, more often than not, people who open a brokerage account will lose money rather than make it.

 

If you are serious about being a good trader, you need to approach the practice of trading with the same level of rigor you would apply to any high-level endeavor. The market does not owe you or anyone else great riches. The market does, however, occasionally tease a large number of people with seemingly easy gains (during bubbles and other manias), only to take them away again.

 

Trading is a business. It’s a profession. It’s a skill you have to learn.

 

Have a Business Plan

 

Most businesses fail because they fail to plan.

 

Business planning is the backbone to success. It shows you where you’re coming from, allows you to organize your thoughts and objectives, and helps you come up with a plan to keep you in the markets and trading successfully for the long term.

 

Van recommends that traders and investors develop a thorough business plan to guide their trading—even if you're already trading well.

 

Your business plan should cover all of the following areas:

  • Your vision.
  • Your purpose.
  • Your objectives.
  • A thorough self-assessment of your strengths and weakness based on real trading logs that you collect (if you haven’t done so already).
  • A thorough assessment of the big picture and the fundamentals that might be behind any trend.
  • A complete understanding of your beliefs about the market.
  • Procedures for getting empowering beliefs and mental states behind you.
  • A documentation of your research procedure for developing new systems and determining how to analyze their effectiveness.
  • Your procedures for developing and maintaining discipline.
  • Your budget and cash flow systems.
  • Other necessary systems such as marketing, back office record keeping, etc.
  • Your worst-case contingency plan.
  • System 1—which is compatible with the big picture.
  • System 2—which is also compatible with the big picture.
  • System 3—which might come into play should the big picture change.

If you have all of those things, you have a chance of doing well. Your business plan is a powerful tool that will improve your trading and focus your life.

 

How to Handle Hot Tips:

 

What happens when someone gives you a tip or an idea about the market? Do you get excited about it and want to act, or do you become skeptical and suddenly distrust the person giving you the tip?

 

The only correct response to any “hot tip” is to integrate it into your trading game plan to see if it fits. If it does, you can evaluate it further, using your plan's criteria. If it doesn't, you can simply discard it. You should never just run out and buy some closed-end Thai mutual fund simply because “Van recommended it." You should always first consider whether the tips you receive harmonize with your plan.

 

Van discusses mental rehearsal as one of the ten tasks of trading. The point of mental rehearsal is to determine what could go wrong with your trading plan and determine how to deal with it in your mind. That way, when it does occur in the heat of the moment, you are ready to deal with any distractions that might come up. Think of the tips you receive as a possible distractions. How do you react?

 

This tip is a test in several ways. First and foremost, it is a test of whether or not you even have a game plan.

 

Do you have a plan that helps you deal with hearing about a “new, sure-fire, can’t-lose” investment? If not, it’s time you developed one. Do whatever it takes to come up with a thorough business plan to cover your trading or investing. Van ranks it among his top requirements for traders.

 

Every outcome is preceded by a process. You will not make money trading unless you follow a predetermined plan and continually stick to that plan. That’s why you should pat yourself on the back every day if you can honestly say that you totally followed your rules throughout the day. Every "Market Wizard" arrives at that stature by taking one trade at a time. The primary difference between that person and the average trader is that the Market Wizard probably continued to follow his plan every single day.—Van Tharp

The best place to start to learn more about this topic:

 

Business Planning 
For Traders and Investors

 

 

In this comprehensive Audio series, you’ll learn all you need to know about setting up a viable business plan for your trading. Van Tharp interviews a variety of special guests and provides you with weekly exercises designed to assist you in preparing your plan as the series progresses.

 

Download and listen today!$ (249).

Learn more here.

The Rest of The Tharp Think Concepts:

 

Psychology of Trading

Perfectionism, gambling, unnecessary losses, not being able to pull the trigger….

These are just some of the issues that traders contend with in the markets every day. What causes us to think this way and how can we learn to become better and more profitable traders? ….read more

System Development

Everyone is looking for the Holy Grail in the markets. How do you find the ideal trading system, the stock that is going to take off or that one big winner with your name on it?

There are hundreds, if not thousands, of trading systems that work. But most people, after purchasing such a system, will not follow the system or trade it exactly as it was intended. Why not? …read more

Risk and R-Multiples

Risk to most people seems to be an indefinable fear-based term – it is often equated with the probability of losing, or others might think being involved in futures or options is “risky.” Van’s definition is quite different to what many people think …read more

Position Sizing™

Position sizing is the part of your trading system that tells you “how much.” How many shares or contracts should you take per trade? Poor position sizing is the reason behind almost every instance of account blowouts…read more

Expectancy

One of the real secrets of trading success is to think in terms of risk-to-reward ratios every time you take a trade. Ask yourself, before you take a trade, “What’s the risk on this trade? And is the potential reward worth the potential risk?” What can I expect my trading system to do for me in the long term? ….read more

System Quality Number® (SQN®)

After a number of years researching position sizing™ strategies, Dr. Van Tharp developed a proprietary measure of the quality of a trading system that he calls the System Quality Number or SQN. ….read more

 

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