Your business plan is your personal blueprint for trading success. It includes not only your goals, but a detailed plan of how you plan to get there. This plan should go far beyond the details of your trading methodology. It should include structuring not only your trading environment, but your whole life. Your mind and psyche are your main trading assets. How do you plan to protect them throughout the year?
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. You must have allowances in your plan not to give back more than a minimal percentage of profits. Your trading plan must include all the details such as which markets you will trade, which strategies you will follow, and what type of leverage you will use. Only by having a trading plan will you be able to avoid emotional trading decisions.
I am of the belief that it is never too late to start thinking about working on a business plan for the current year. It is also never too early to think about putting together a business plan for next year. This is because it will take you some time to think about the things that I am going to say, and work on your own program.
Trading is abstract and there are so many questions and decisions to be made that come up during the day. Your goal as a trader is to execute your plan and leave the thinking out of it. A daily plan helps to aid in providing ritual, organization and structure.But before you think about how to construct your daily game plan, you need to first put together a broader annual business plan. In setting up your larger business plan, you will be designing a trading program for yourself. Many of the questions our office receives pertain to what type of trading patterns to follow, what time frames to trade on, how to place orders, and which markets to trade. Your business plan should address these issues.
When you setup up your program, you should think of yourself as your own best client. Your account is a client. Your goal should ultimately be to design the type of program you could trade several accounts on, or, think if you wanted to add just one client. You would need a very specific type of program to present to that client, and then, assuming they would be monitoring your trading activity everyday, you would be more conscientious about following your program. Leverage and money management issues would be addressed in this "program", as would markets traded, drawdowns, types of trades made, etc. I will share with you some of the ways I design my program. Before I do, the business plan includes so much more. It must also include goals and motivational factors, as well as rules, guidelines, and plans to keep you away from trouble areas or spots that you are weakest in.
I find that as a trader caught up in the markets, it is hard to take time off. So it is easy for me to hit the burnout point. I have a tendency to put too many positions on. Taking positions into the last day of the quarter seems to be my achilles heel and bite into my bottom line. So, I am making a very clear provision in my business plan for 2000 NOT to have big positions on going into the last day of the quarter. If you want to give yourself the liberty to take several weeks as you develop your plan to still break a few rules, think about it as you do it. Think which rules are really going to serve you best. This is why I said it might take some time to mull over a few things.
I will give you the essence of my program and then you will see how easy it is to design your goals around your plan. I have separate accounts, one for scalp trades, and one for position trades. Now It is easy to design different goals for each program. For example, if the SPs are the only market you are trading, one goal could be to include a range of expected activity level in making SP scalps. This could comprise your core program or be designated as supplemental activity. By having a goal to make a certain amount of scalp trades a week, you will challenge yourself a bit.
Will you include position trades, index options or GLOBEX activity in your program? Look at you past trading performance. It is easy to break down if you are more profitable sticking to short term scalps, or how much holding longer-term positions really adds to your bottom line. I like to keep my SP scalping activity separate, so for longer-term positions, I like using the NASDAQ futures or SP options as a separate trading vehicle. For trades made in the domestic futures markets, I try to hold trades anywhere from 2 - 8 days. Occasionally I will day-trade the bonds, but I try to play for overnight follow-through in most markets. This was my basic program carried over from my CTA program.
So, I essentially have three separate programs: SP scalping, short term swing positions based off classic chart patterns and 2-period Rate of Change pattern recognition, and long-term positions which can also include stocks, options, mutual funds, etc. You need to think about your mix that will work for you and be CLEARLY organized as to how you are going to manage your money. Each account should have a specific level of funding and number of contracts that can be traded in it.
There should also be leverage guidelines and money management rules for each type of trade. Most of the time I do not use my full line. I trade 1 contract per "x" number dollars in my account. Determine a unit size for yourself. As your account grows, you can add another contract. These things should all be spelled out in your business plan.
As for goals, you can structure those two ways. Some people set a dollar amount goal for their trading activity. I have actually avoided doing this in the past, instead choosing to focus on maintaining a certain amount of activity level. I figured if I just did the best job I could each day, the profits would take care of themselves. Sometimes setting a dollar amount can be discouraging during drawdown periods or encourage you to force trades when nothing is going on. This year, I want to have my biggest trading year ever, so that is my goal.
But for some people, a better goal might be to do "x" number of trades on a regular basis, or try for "x" number of SP points per week. This helps to reach the larger goals. I would like to reach half my goal from my daytrading account and half from my position account. Now the question has come up, sometimes gains are unevenly distributed. If you set a target for yourself to make 3 SP points per day for each contract you trade, than do you quit when you make these three points? It doesn't quite work that way. When you are hot, you are in synch and should keep trading. If your 3 points come easy to you, than why would you quit on the day? You could very easily have a scratch day the next day...or even a losing day.
But you must have SOME sort of guideline. This will serve as your motivation to make a trade in the first place! You must have some reason to pull the trigger in the first place, because so many times it is too easy to hold back on being aggressive. Set a goal that you can not only reach, but that you can exceed. So again, if you are a newer trader starting out with a small account, perhaps your goal will be to take 8 SP points out per week. How are you going to achieve that? If you have a smaller amount of capital you do not want to trade on a longer time frame. You need to find 1-2 spots a day where you can go in and try for 2 points.
Now you are breaking your goal down into bite size pieces. How much can you risk on each trade? When I make "short skirt" type trades, I automatically risk no more than three points. If you decide that you can't risk more than 2 points, you are going to have to be very careful on picking your spot. You must be able to see your risk point before you go in. See the market turn and then enter "at the market" or as close to that turn as you can. So, that might be a "program" that you can start out with. Now, what might happen if you start out with your scalping program, is that for a few days, the markets might be dull, choppy, Perhaps you feel like you are behind your goal a bit. But then one day, your 2 point trade turns into a 5 point one...or, you get motivated and make a few more trades and exceed your goal. OK?
Don't put pressure on yourself to make x-amount everyday, but you must have a guideline for what you would like to achieve on a monthly basis. Then at the end of the month, you ask yourself, how is your performance standing up to your business plan? If it is falling short, what needs to be adjusted? The biggest things that keep a trader from meeting their plan are: getting sloppy a few times, forgetting to place a stop, or getting stubborn on one trade. These are the things I see. One mistake waiting to bite you in the rear.
But guess what...it is possible to make all these mistakes and yet STILL make money. Astonishingly, the markets can be more forgiving than we think. It just takes a bit of persistence. So, each month, set your goal to do a better job than the month before. All you have to do is work on making fewer mistakes.
OK!...on to some more parts of the plan - record keeping and structure. THIS IS AN EQUALLY IMPORTANT PART to your business plan. Here is why. Routines and rituals keep things automatic. Additionally, they help set up the daily Game Plan (which we will get to next). A trader needs to get to the point where picking up the phone is just one more thing he does during the day. At the end of the day, I log all my daily numbers. This might seem a useless endeavor since this data is already listed on my computer and I am merely writing it down on paper. But this ritual brings a certain amount of relief to me because I can shut down making all decisions and do some therapeutic grunt work. I thrive on menial tasks and grunt work because I do not have to think during this time. It is a ritual that wipes my mind clean of all the good and bad that happened during the day.
I also have sheets where I log each trade, and lately I am becoming more diligent about doing my P&L at the end of each day. I used to do this during the eighties but stopped the last few years. Part of my business plan for this year includes becoming even more involved in record keeping. I am monitoring the amount of slippage on each trade and the average holding time for each type of trade. You see, you must make it into as much of a detailed game as possible to draw yourself into the game, increase the intensity.
The object is not to burn yourself out either - wrong idea. You do not have to focus on every tick, but rather the opposite. Keep your monitoring of the markets a Zen type of thing, meaning stay loose and relaxed. Sometimes the best trades will happen out of the corner of your eye. For example, perhaps you have been watching a market for a few days. You have been doing your nightly homework watching a particular setup unfold. Then, when the market starts to act a certain way that confirms your analysis is correct, you should be all over it.
You can't force the trades, but when you are relaxed you will see them better. The best way to stay relaxed and loose is to be involved in some sort of ritual. Like the tennis player who bounces the ball up and down a few times before he serves, does a dance with his feet and wipes his brow - these are all rituals to keep his serve loose. The same tricks apply with trading. You can doodle and make swing charts on paper during the day, write down periodic readings of the ticks, or note extreme price levels.
I hope you are getting the basic idea so far, because I do not want to elaborate to the point of overkill. But here is one more example. The person I worked for when I first traded on the Philadelphia Exchange had been a physicist. He spent 1 1/2 hours at the exchange before the market opened and would be there for an hour and a half after the close. He was very methodical and organized, writing out tickets and orders in advance. He was quiet and unassuming, and as I found out later, he was also one of the most consistently profitable traders down there. The person who first backed me when I traded in San Francisco taught me to chart the 3/10 oscillator every night using Security Market Research charting service. He also taught me to log the daily trin, tick, breadth figures, etc., in addition to writing out orders for the next day. Both these guys are still trading today.
These are some of the common traits I have noticed among those traders who succeed. They all have daily routines and rituals. You must balance out the abstract conceptualizing process the market requires with some tangible activities.
Your business plan should include making a daily Game Plan for each day's trading. What type of strategy are you going to use for the next day? Is the market due for a consolidation type day, one that starts to form a small trading range? Or is it poised for a breakout, a potential trend day? Is there an opening play for the morning? For example, if there is an early morning sell off, will it setup a buying opportunity? Or should rallies be shorted? Your game plan could include looking to sell a test of the previous high or buy a pullback to the hourly moving average.
At night, it is easy to note where the hourly grail patterns might be in other markets. Write down imaginary orders..."Buy Silver at such and such a price if it retraces to EMA". You will be more likely to make the trade if you follow this practice. Perhaps there is a particular market you have been following with a directional bias. Write down the previous day's high or low and use that as your pivot.
When managing longer-term trades, you will be more likely to stay with them if you write out clear instructions for trailing a stop. Write down your stop level and continue to move it as the market moves in your favor. My favorite way to trail a stop is to use a two-bar channel stop, or to use hourly support and resistance levels. In a downtrend, I will trail it just above the last hourly swing high, but in an uptrend, I will give it more room and trail it beneath the hourly low of two levels ago. Trail your stop not on the last swing low but the one before that one. This is because up-trending markets are more prone to A-B-C type corrections. There is not a perfect way to trail a stop - they all have their flaw. A 2- bar trailing stop works well, on paper, but personally, I hate the give back on any trailing stop and usually look to exit on some sort of buying or selling climax.
Sometimes, trading in another market can be a good diversion to keep you from taking profits too early on a position that is working. You have to let time work FOR you in winning positions.
Game plan - Business plan - overall trading environment structure...just start thinking about the way you really go about things. Get yourself down to a one day at a time type of process. Even if you are a position trader, your job is not to think about too far into the future, it is still to take one day at a time, even if it is just a monitoring process. The tape is always in the here and the now. Your goal should be to do the best job you can that DAY. Follow your rules and your game plan for that day. If the market moves in ways that were not in your game plan, that is OK. The wrong game plan is always better than no game plan at all. At least if your game plan is wrong, you will know it fairly quickly and that in and of itself has forecasting value.
It is OK to miss a million trades, but it is not OK to miss one that setup on your game plan you have been waiting for. You can also adjust your game plan midday. Perhaps you were looking to sell a rally back to the hourly moving average, but the market blasts on through. It is OK to say, "because the market failed at that benchmark, it might mean there is a stronger move in the opposite direction". Perhaps then it would signal to switch gears and start looking for the first 5-minute grail buy. You get the idea!
Here is a list of some of the types of things you can include in your annual business plan. This will give you something to work on. Start thinking about putting together a professional program, comprised of bite size pieces.
- What methodology or patterns are you going to trade? It is OK to have a "library" of setups, but most people do best concentrating on a niche or particular technique. Learn to do one thing consistently well instead of trying to master too many styles.
- Which markets are you going to trade? If you trade equities, think about keeping a "stable" of stocks to follow. Don't get caught up in scanning a database of too many issues that you are not familiar with. It invites unfortunate situations where there may be pending issues or reports in the company that you are unaware of. If you have not had much success trading soybeans or silver in the past, why try to continue to trade them in the future?
- How much capital are you going to put into your trading accounts? Something I have to add here, stay away from looking at percentage returns when evaluating performance statistics, such as percent return or drawdowns, on your personal account. Concentrate instead on dollar amounts. What is your dollar amount tolerance? My stomach turns at a specific dollar amount drawdown. Percentages vary too much according to how much money you keep in your account. You might have a net worth of 1 mil and keep 100,000 in your trading account and your situation will be entirely different than a person who has 5 mil and keeps 100,000 in trading account. The person with the higher net worth will feel freer to use a different type of leverage. So think in terms of dollar amounts...how much are you willing to draw down to?
- How do you plan to enter, exit, and manage trades? I like dividing my contract size into two units. Sometimes I go all in and then scale out in halves. Other times I put half on and look to add the other half. Some positions I keep half on as a core and use the other unit as a scalping unit. Whatever style you choose, it should be written down into your plan.
- What is your plan to manage drawdowns? How will you evaluate when you need to take time off?
- What are your monthly goals? Are you going to strive to make a certain number of trades each week or perhaps a certain number of SP points? Remember, these are guidelines by which to measure your progress. Some months will be better than other months. The end of the month is a good time to do a periodic review. Most businesses do this on a monthly or quarterly basis.
- Include a daily routine in your overall business plan. How are you going to evaluate your performance each day? Keep a notebook of the things you do RIGHT. Pat yourself on the back for small moral victories, such as exiting a losing position in a quick fashion. Note the small incremental improvements you make.
- Create an office environment designed to facilitate performance. Eliminate distractions and outside influences. Reduce glare and get a comfortable chair. Invest in good equipment. Invest in an excellent data feed.
- Include a provision that will keep you from trading if outside circumstances create an unusual stress, such as health, divorce, or a major move. You might as well just write a check out of your trading account and kiss it goodbye. This is a hard thing to recognize before it is too late. People LOSE money during times of 10 major stresses: death, taxes, divorce, moving, health...you get the point. Trading is a performance-oriented discipline. If you can't perform well, cancel the show... If a tennis player severely sprains his ankle, he cancels the match. Why do damage to your ratings? Why mar your statistical record with sub-optimal performance?
- Record Keeping - Rate yourself on your routine and structure and nightly homework. Do you do research or have way of logging results? What type of research is included in your program or plan? My problem is I stack too many projects up on back burner. I need to streamline this area for myself. Or, I get diverted doing research, go off on a tangent late at night and stay up way too late. Then I am not in optimal condition the next day. My business plan includes a bedtime. I promise myself to adhere to it.
- Rewards! All work, no play makes Jack a dull boy. You must have outside interests or hobbies to get your mind off the markets at the end of the day. You must treat yourself to something you really want. If you spend money on your self you will eliminate subconscious poverty thoughts. I am serious. Treat yourself like a million bucks and you will be worth it soon. Maybe after a good week you treat yourself to a massage, or buy something you really want. I already have something in mind that I will do for myself if I meet my goals next year. It is something that does not cost too much but that I could never justify spending money on because it might seem frivolous. But the money comes from my trading account so nothing is frivolous!
- LASTLY, What plans do you have to continually improve yourself? See yourself as a top-notch person, health-wise, performance wise, and attitude wise. How do you keep advancing in life? You know the old saying, if you are not going forward, you are going backward. Educational pursuit such as books and study courses are important, but don't neglect spiritual pursuit, or outside projects...perhaps building your own website, starting your own trading network, writing your own book on all the trails and tribulations of the business, or working with a charity.
All the above subjects are more important to your long-term success in staying in this business than any trading indicators or setups! People do not lose money from entering on bad setups. They lose money from getting sloppy in their trading and sloppy in their habits and life. They allow emotional trades to creep into their program because they have not done their homework and are not prepared. Your business plan is a contract with yourself. It is a contract to treat yourself as your own best client. Surrounding yourself with guidelines, rules, and an overall structure can be the vehicle that brings you freedom from performance anxiety and gives you the confidence that you can take your trading to the next level.
Linda Bradford Raschke has been a full-time, professional trader since 1981. She began as a floor trader and later started LBR Group, a professional money management firm.
In addition to running successful programs as a CTA, she has been principal trader for several hedge funds and has run commercial hedging programs. Raschke was recognized in Jack Schwager’s book, "The New Market Wizards", and is well known for her book, "Street Smarts".
More of her writings can be found on her website (see link above).