Saturday, June 03, 2017

A Technique to Supercharge Your Trading Business

Let's say you're a venture capitalist.  Your job is to fund promising startup businesses.  An enthusiastic entrepreneur that you have initially funded is now returning for a second round of capital.  The entrepreneur explains that the business lost a small amount of money during the initial period due to challenging market conditions.  The entrepreneur notes that some of the decisions made over that period were made out of overenthusiasm and that, going forward, investments in the business would be made in a more disciplined fashion.

That's it.  That's the pitch for renewed funding.  You're the VC.  You're thinking:  Seriously, dude, WTF?

Of course, no credible entrepreneur would expect funding with a sketchy plan that basically consisted of, "There were limited opportunities.  I was too eager and lost money, but will be more careful in the future."  Yet many traders will continue to fund their own businesses with little more planning or foresight.

I like to frame it this way:  If someone asked *you* to invest in a trading business and then described to you results that matched your own, a work ethic that you display, and a planning process that mirrors yours, would you choose to invest in that other person's trading business?  

My hunch is that the answer in all too many cases would be no.  Yet we will invest our own time, effort, and money with little more forethought.

There is a planning process that I have found extremely useful in my recent work with traders.  It consists of a monthly review of all facets of trading.  The review includes a daily P/L summary and performance metrics, such as average win size, average loss size, win rate per trade and per day, breakdown of P/L by strategies and trade types, etc.  The review also flags the greatest winning and losing trades of the month, for quick identification of what went right and wrong.  The monthly review also summarizes:
  • Sources of opportunity during the month - An assessment of how well the trader took advantage of that opportunity;
  • Sources of risk and threat during the month - An assessment of how well the trader navigated those;
  • Goals that were worked on during the month - An assessment of progress and areas of improvement still outstanding;
  • Readjustments to make further improvement toward previous goals - New, daily strategies to improve trading 
  • Anticipated opportunity during the coming month - Goals and daily strategies to be employed in the coming month to monetize that opportunity;
  • Anticipated risks during the coming month - Goals and daily strategies to be employed in the coming month to minimize those threats;
  • Self management during the past month - Assessment of how well the trader stayed in peak performance mode;
  • Improvements to be made in self-management in the coming month - Goals and strategies to improve self management in the coming month;
  • Progress on research and development made in the past month - Progress that you've made in researching and implementing new trading strategies;
  • Changes in your research and development and new initiatives to be implemented in the coming month - New efforts you are planning for the coming month to find and trade fresh sources of opportunity and how you will pursue them on a daily basis.
In other words, the monthly review is a thorough update of an annual business plan.  Conducting the reviews monthly allow active traders sufficient time to detect meaningful patterns in trading, but are also sufficiently frequent to ensure mid-course corrections when progress is lagging.  The monthly review can be reviewed by mentors, coaches, and valued colleagues for ideas and suggestions.  It becomes the backbone for daily goal setting and daily work on trading.

Imagine two traders:  One writes about the past day's trading in a journal and sets mental goals for the coming day.  There is little score-keeping and little coordinated carryover of goals from one day and week to the next.  The second trader works from a comprehensive annual business plan and implements that with all-encompassing monthly reviews.  Those reviews focus daily efforts and ensure that each day entails work on the goals set in the review. 

Who is more likely to grow over time?  Whose growth is most likely to compound month over month, creating exponential growth?

Great advice for any trader:  Run the kind of trading business you would want to fund if someone else came to you with the opportunity.

Great advice for any trading firm:  Run the kind of business that only funds comprehensive business plans and rigorous review processes.