Sunday, February 22, 2015

Best Practices in Trading: Organizing Your Trading Business

If you run your trading as a business, then it's clear you are both the worker and the manager.  You are the researcher developing trade ideas; you are manager of your positions and risk; and you are also a self-manager.  Many times trading does not succeed because the business is not well run.  Traders jump from one role and function to another, without grounding each of these in productive routines and best practices.  A solo shop owner has distinct processes for selecting and ordering merchandise, displaying the products, serving customers, and managing the finances.  The success of the shop hinges upon executing each of those functions efficiently and effectively.

Today's best practice is offered by Bryan Lee, a full-time futures trader from Malaysia.  He describes how he divides his work into three components:

"I trade several futures markets in the U.S. and Asia, which includes crude oil, gold, bonds, mini Dow futures, soybean, wheat, corn, palm oil, soybean oil, etc.  My trading approaches are long term trend following and swing trading.  My trading is system-based, meaning all trading decisions are based on signals generated by my trading systems.  I integrate my own risk management algorithms in all the products in my portfolio.

I divide my trading into three parts:

1.  Research and Development - This includes study of trading methodologies and  research, development, and backtesting of new trading strategies.  Risk management for the entire portfolio is also included in this section.

2.  Trade Execution - I wake up at 5 AM (Malaysia time) to run my trading system.  Since my systems use end of day data, they will only generate trading signals before the market open each day.  Then my job is to place the signals as trade orders in the trading platform.  When a trade order is triggered, I am informed by the platform.  I will then jot down the time, price, lots, and other trade information in my trading log book.

3.  Auditor - The job of an auditor is to verify and audit all trades done for the day.  This is typically done at the end of each trading day.  I trade on a GLOBEX platform, where many futures markets are open for almost 24 hours.  I wake up at 5 AM and check for all the trades done for the day.  I will verify the record in the trading log with the statement sent by the broker.

I perform three roles, a researcher, a trade executor, and an auditor, all by myself, but I only perform one role at a time.  I can't be a researcher and a trade executor at the same time.  This will create conflicts and affect my trading."

The key idea that Bryan highlights is that he clearly delineates the major functions of his trading and has a distinct time--and processes--for each.  Although Bryan is a systematic trader, his best practice applies to discretionary traders as well.  Time needed for research and market observation must be separate from time spent actually trading and managing positions--and both must be separate from time spent working on oneself and improving one's performance.  It's not that successful traders follow a process.  Rather, they divide and conquer, creating separate processes for each part of their business.

What makes you a successful idea generator?  A successful risk manager?  A successful self-manager?  If you don't have distinct time devoted to each, it is unlikely that you can perform and grow in each of those functions.  Trading well ultimately means running your trading business well.  

Further Reading:  What Makes Good Traders Great Entrepreneurs