Sunday, May 24, 2015

How To Improve Your Trading Business

Think of your trading as a business.

Think of yourself as a business leader.

It's time to analyze your trading business.

Break down your business into the strategies you trade:  the patterns, setups, themes, asset classes, types of trades, and/or relationships.

Break down your profit/loss by strategy.  How much have you made on each strategy?  What is the variability of returns within each strategy?  How are the returns of each strategy correlated with one another?  Under which conditions do your strategies perform best and worst?

Now revamp your money management across strategies.  Allocate less risk to the strategies with the most volatile returns; most risk to the strategies with the best risk-adjusted returns.  Allocate less total capital to strategies that are highly correlated with other strategies; more capital to strategies that produce positive returns with low correlation.

You are starting to make the transition from being a trader to being a portfolio manager.  As a portfolio manager, your trading business is a diversified one, and you manage the allocation of resources across distinct opportunity sets.

There is still much to be done to be a great leader of your trading business.  There is research and the development of new opportunities.  There is also work to be done to improve efficiencies within each strategy:  how you express the views of your strategy; how you enter and exit positions; and how you scale into or out of positions.

Then, of course, there is self-management:  managing your life so that you're in the best possible shape to run your business effectively.

Your goal is to run the kind of trading business that you would invest in if someone was raising capital and doing exactly what you're doing.  

Further Reading:  Leading Your Trading Business