Treat Trading Like a Business by Van K. Tharp, Ph.D.

 

In the early 1990s, I did about 10 workshops with Jack Schwager’s New Market Wizards interviewee Tom Basso. In each of those workshops, Tom said, “I’m a businessman first and a trader second.” One of the major mistakes that most traders make is that they do not have that same business attitude. You need to treat trading like a business and prepare for the unexpected. When you don’t think like the CEO of your business, disasters will arise and cause havoc.

 

  • What if you were a hedge fund clearing through a firm that collapses such as PFG Best, IMF Global, or Refco?
  • What if a personal emergency occurs that distracts you while you have open positions without stops to protect you?
  • What if tax law changes totally alter the assumptions behind what you are doing?
  • What if some big firm starts doing what you are doing and makes it difficult for you to execute trades?

These are just a few of the many things that could occur and have occurred to our clients at various points in my 30-year history as a trading coach. One trader even had a squirrel in his attic that periodically chewed on various wires. Nothing was ever totally out, but he kept getting intermittent failures on his phone, cable, and internet as a result of wires that were not 100 percent.

So what happens when these things occur? If you trade with a trading mindset and just focus on trading, you could be finished. If you treat trading like a business, do you have a plan to deal with any of these events or the thousands of other things that could happen? I call this worst-case contingency planning and it’s just one part of a well-developed plan for a trading business.

Developing Your Edges

First, you need a working document to guide you through your trading.

I once determined that my Super Traders needed to go through 138 steps to be successful. I then distilled those 138 steps down to 17 steps and 52 questions, which I presented in a workshop called The 17 Steps. When people finished that workshop, they were amazed. They had only about 20 minutes to work on each of the questions, and some of them might take months to finish. However, the common denominator for all attendees was: “Wow, now finally I understand what I need to do to be successful in this field. I now have a blueprint for success.” As a result, we subsequently renamed that workshop Blueprint for Trading Success (next online session starts in January).

Here are the ideas you need to consider in order to be successful as a trading business that we cover in that workshop. These are 15 areas that you need to cover in your working document or trading guide.

1. Initial assessment:

Write down your beliefs about yourself and your beliefs about the market.
Determine your strengths, resources, and skills.
Determine your challenges and how you’ll overcome them.

2. Setting your objectives:

First, determine your financial freedom number and develop a plan to take that number to zero. When you’ve done that, doing more work is optional because you can devote your life to doing what you love. For more about the financial freedom number, see my book Safe Strategies for Financial Freedom.

3. Based on your own assessment of who you are, determine your trading objectives.

What are your goals as a trader? What can you tolerate in terms of drawdowns in order to get there?

4. Big picture and market type assessment.

What do you believe about the big picture? How will you measure and monitor what is going on? How will you know if something changes?

5. Determine and list your personal edges.

Make a list of your edges in the market. For example, you don’t have to be in the market unless there is a good opportunity. If you understand why people lose, and take steps to correct those errors for yourself, then that’s a huge edge.

6. Key systems for any business.

There are many more systems, other than trading systems, needed to run a trading business. You need to look at the other systems and determine the following:

  • How will you market to and deal with clients?
  • How will you monitor your cash flow?
  • How will you keep track of your back office? Your trades? Your mistakes? Your R-multiples?
  • What is your plan for doing ongoing trading system research?
  • How will you maintain your own psychological management?

7. Worst-case contingency planning.

You will need a plan for dealing with what can go wrong and how to handle it to minimize the impact of future disasters. This is what we discussed previously.

8. How will you select your trading markets?

Being a good trader in a great market is better than being a superb trader in an average market. Thus, what will you do to select your trading markets?

  • Based on your personal assessment.
  • Based on your big picture assessment.

9. Strategy preparation:

  • Read about trading strategies related to your market.
  • Logically work out what can work in that market type.
  • List realistic goals for your performance.
  • List your beliefs about that market.
  • Determine the time frame for trading that best fits you for that market type.
  • Repeat this step for each of the various market types—up, down, and sideways, under quiet and volatile conditions.

10. Strategy development.

You will need to develop at least three systems that have an entry, determine your initial risk, and determine your profit taking exits. How will you do this? What ideas do you currently have?

11. How will you determine if your systems are any good and under what market types will they work?

12. What are your criteria for feeling comfortable trading a system?

Does it have to fit your beliefs? What other criteria must it meet?

13. What position sizing strategies will you use to meet your objectives?

How much time will you devote to position sizing strategy development?

14. Do a complete self-assessment.

Do you have the qualities that it takes to be successful as a trader/investor?

15. What ongoing regular psychological / spiritual self-work will you be doing to make sure that you stay on top of your game as a trader?

How much time will you spend on self-work? What will you do if you get off track psychologically? And how will you know this?

16. What ongoing physical self-work will you do to make sure that you stay in peak condition?

Here, the areas of diet, rest, and exercise are particularly important.

Do you have plans to guide your trading in each of these areas? Do you have any kind of written plan at all? If not, you could keep doing what you are doing and see how that goes. If, however, you’d like to professionalize your trading and reap the benefits of a profitable business, then create a strong plan to guide your trading.

This article is a modified excerpt from Dr. Van Tharp’s Kindle book Eight Edges You Must Have: Your Written Trading Plan, available on Amazon.

Note from Blueprint For Trading Success Workshop Instructor RJ Hixson:

Most traders probably believe that a written plan is a good idea but don’t know where to start. At the Blueprint For Trading Success workshop, we study each area Van describes above to help you turn your trading hobby into a legit business. Creating a business does take work but it doesn’t have to remain a mystery when someone else can shine a light on the path other successful traders have taken before you. If you are committed to becoming more “professional” in your trading — or if you are just exploring what that would take, learn how at the next Blueprint workshop.

The next Blueprint workshop will be presented as a two-hour session once per week over twelve weeks – which opens up a great opportunity for the first time ever. Because of the three-month online format for this Blueprint, motivated students will have the option of writing their plan during the workshop and finishing with a full business plan. Previously, people would attend the three days and walk away with a really strong outline for their business plan. After returning home, they would flesh out that outline over a number of weeks or months. With the online schedule, you’ll have enough time to work on each section as we progress in the course.

As a side note, I love this workshop. Before attending Blueprint some years ago, I had already attended nearly every other VTI workshop and I understood a lot of important parts about trading – though I understood them as stand-alone topics. Blueprint finally revealed how a successful trading business integrates all of those pieces through a cohesive plan. I loved the insights I gained at Blueprint and now I love helping other traders gain similarly powerful insights so you can reach your trading goals.

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