As a trader, you need a mission statement. I've recently spent several days doing creative brainstorming on how to take my company to the next level. Part of that process involved determining our mission statement. I've always known what its mission was, but I've never put it down on paper. Nor have I thought about our expansion with respect to that mission. It's a critical process and it's one you should do with your trading as well. It also fits with the overall idea that you must first understand who you are and who you want to be before you develop a business because your business will develop out of your statement about who you want to be.
In the brainstorming process, I learned a technique that works in running any successful businesses. And when I thought about it, it was obvious that it was a technique that it very applicable to trading success. However, the first part of it is to create a mission statement for your trading business. Here are a few examples of what that mission statement could be for you.
- Help others to prosperity by becoming a highly successful money management firm.
- Build a hedge fund with at least $250 million under management.
- Produce an infinite wealth stream for me within five years.
- Be a vehicle for me to grow money-wise and as a person.
- Fund a charitable foundation.
Second, you need to evaluate new projects with respect to the mission statement. When you have such a mission statement, you can constantly evaluate new projects with respect to that statement by asking: Is my objective in this project critical to the mission of the company? People are always asking me to do this project or that project. For example, one trader, who was a sound engineer by training, said that when he came into town, we could start working on developing specific meditations for traders. And while he idea is a great one, it is very low on my list of mission-critical tasks that need to be done in the near future. As a result, it probably won't happen. But without such a process in place, I'd probably spend most of my time doing such non-critical tasks and thus not be able to accomplish what is important for the company to meet its goals.
Most traders just treat their trading business like a hobby. They don't treat it seriously. For example, some are constantly looking for new or better systems. Some trade discretionarily. Still others will manage the money of a few friends or relatives without thinking of the consequences. These types of objectives need to be evaluated with respect to your trading mission statement to see how they fit.
Let's make the assumption that you have a mission statement for your trading business to produce an infinite wealth stream for yourself within five years. Infinite wealth basically means that if you stopped working, including working at your trading business, you would have enough passive income (i.e., your money working for you) to continue your current lifestyle. You could accomplish this two ways: First, you could accumulate enough money so that if you invested it in t-bills or some other form of passive investment (i.e., I'd recommend a good hedge fund over t-bills because you can get a much better rate of return), you'd be infinitely wealthy. Second, you could automate your systems for trading so much that you could hire someone else to execute the trades for you.
Now let's take a look at some of the objectives we introduced to see if they fit within this mission statement:
"Let's try this new system to see if it works better." If you have a system already that can help you achieve this goal, then you are probably just wasting time. For example, I've know people with systems that can easily net them 100% or more each year who constantly jump on the next new system that comes along. On the other hand, if you don't have a system that will meet your mission, then you need to evaluate both your current system and the new one in terms of R-multiples, expectancy, opportunity, and the concepts involved so see if you have something that logically makes sense. For example, if you assume that you will risk 1% per trade, then you only have to net about 8R per month to make 100% per year. Think about it. In most cases, someone else's new system will not help you because they have not evaluated it in these terms. It's usually just a slight change in your thinking that will net you great rates of returns. Thus, looking at a new system is probably a total waste of time, given this mission statement.
"I want to make discretionary trades because I think I can outperform a mechanical system." This objective might fit within the mission of infinite wealth if your plan is to accumulate a certain amount of money and then invest it into various forms of passive income to produce your infinite wealth. However, if you plan to produce infinite wealth through your own trading, then it does not fit within the objectives because you will always be tied to your trading—you will always have to work if you make discretionary trades. In the second case, you should abandon the idea of discretionary trading.
"I'll manage money for a few friends and relatives." This objective could be a total distraction for your mission or it could be a means to an end, depending upon how you treat the aspect of managing money. For example, are you going to do it for free or are you going to charge a fee. If you plan to charge a fee, then it could help you meet some monetary target. However, are you prepared to deal with the psychology of the people for whom you are managing money? Do you have back office accounting procedures in place? Is the effort to deal with accounting and your clients worth the distraction to your trading? If the answer to any of these questions is "no," then this is not a mission critical objective and should be abandoned on the spot.
Van K. Tharp, Ph.D.
TradingEducation.com