Friday, August 30, 2019

Running Your Trading As A Business

I had an interesting situation recently in which a trader wrote to me about a start-up situation.  I interpreted the email as a request for advice regarding starting up a hedge fund or other similar money management vehicle.  I responded that the initial steps were:  1) set up a viable business plan that explains how the fund will make money in different kinds of market environments and with different kinds of strategies; and 2) identify the people to be hired that would be best for implementing the business plan and maximizing the effectiveness of the trading.  Only after figuring out the right plan and the right people, I suggested, should be focus go toward raising capital and finding the right capital partners.

It turned out I was wrong in my interpretation and the trader was simply interested in going live in his own trading account.  That's when both of us realized that the advice I had given with respect to starting a fund is just as applicable with respect to one's own, personal trading.  In other words, your trading truly is a business and approaching it as such maximizes your odds of success.

So let's pick apart the advice and see how it applies to our own trading:

1)  A Business Plan - Imagine that you are pitching your trading business to a venture capitalist.  How will you convince the VC that this is a business worth investing in?  I'm pretty sure that the average trading journal and the average declaration of "edge" by trading XYZ "setups" would get you laughed out of the room by any experienced VC group.  So how would you convince others of your edge and the uniqueness and robustness of your returns?  If you can't convince others with a compelling business plan, can you truly expect to trade with your own conviction?  You wouldn't invest in someone else's trading if there wasn't a compelling track record and plan.  Why should you invest time and money in your own trading in the absence of such documentation.

2)  The Right Team - Every successful business I've encountered has started by making the right hires.  The founder(s) of the company have identified the right talent and experience to fill their own gaps and to successfully implement the business plan.  That means hiring people who share your vision, who work well with you, and who bring something special and unique to the business that makes everyone better.  If you are doing your own trading, this is no less important.  Your "team" consists of the colleagues and community that you interact with.  Do you have "partners" who you learn from and with?  Do you have teammates who help make you accountable?  The trading community at My Investing Club encourages the formation of TABs:  Trading Accountability Buddies.  The idea is to team up with a like-minded partner to share ideas and to learn from experience:  what you and they have done well and what both of you are working to improve.  

Operating in isolation without a detailed plan would not--and cannot--work for any business.  Many traders fail, not because they lack proper psychology, but because they never took their trading seriously as a business.  If you would not invest in another person's trading if they approached planning and teamwork the way you do, you know that you're not on the right path.  Be the kind of business you would want to invest in because, ultimately, you are investing yourself in your trading.

Further Reading: