by Van K. Tharp, Ph.D.
In the early 1990s, I did about 10 workshops with Jack Schwager’s New Market Wizards interviewee Tom Basso. In each of those workshops, Tom said, “I’m a businessman first and a trader second.” One of the major mistakes that most traders make is that they do not have that same business attitude. You need to treat trading like a business. However, most people don’t, and when they don’t, some disaster arises and causes havoc.
- What if you were a hedge fund clearing through a firm that collapses, such as PFG Best, IMF Global, or Refco?
- What if a personal disaster occurs that distracts you and you have open positions without stops to protect you?
- What if tax law changes totally change the assumption behind what you are doing?
- What if some big firm starts doing what you are doing and makes it difficult for you to execute trades?
These are just a few of the many things that could happen. I’ve seen them all happen in my 30-year history as a trading coach. One trader even had a squirrel in his attic that periodically chewed on various wires. Nothing was totally out, but he kept getting intermittent failures on his phone, cable, and Internet as a result of wires that were not 100 percent.
So what happens when these things occur? How do you treat trading like a business? Do you have a plan to deal with any of these events or the thousands of other things that could happen? This is just one part of the business plan that I call a worst-case contingency plan.
Developing Your Edge
First, you need a working document to guide you through your trading.
I once determined that my Super Traders needed to go through 138 steps to be successful. I then distilled those 138 steps down to 17 steps and 52 questions, which I presented in a workshop called The 17 Steps. When people finished that workshop, they were amazed. They had only about 20 minutes to work on each of the questions, and some of them might take months to finish.
However, the common denominator for all attendees was: “Wow, now finally I understand what I need to do to be successful in this field. I now have a blueprint for success.” As a result, we subsequently renamed that workshop The Blueprint for Trading Success Workshop. Here are ideas you need to consider in order to be successful as a trader that we cover in that workshop. These are 15 topics that should be dealt with in the working document that you need to develop as a trading guide.
1. Initial assessment:
- Write down your beliefs about yourself and your beliefs about the market.
- Determine your strengths, resources, and skills.
- Determine your challenges and how you’ll overcome them.
2. Setting your objectives:
First, determine your financial freedom number and develop a plan to take that number to zero. When you’ve done that, doing more work is optional because you can devote your life to doing what you love. For more about the financial freedom number, see my book Safe Strategies for Financial Freedom.
3. Based on your own assessment of who you are, determine your trading objectives.
What are your goals as a trader? What can you tolerate in terms of drawdowns in order to get there?
4. Big picture and market type assessment.
What do you believe about the big picture? How will you measure and monitor what is going on? How will you know if something changes?
5. Determine and list your personal edges.
You need to make a list of your edges in the market. For example, you don’t have to be in the market unless there is a good opportunity. If you understand why people lose and take steps to correct those errors for you, then that’s a huge edge.
6. Key systems for any business.
There are many more systems, other than trading systems, needed to run a trading business. You need to look at the other systems and determine the following:
- How will you market to and deal with clients?
- How will you monitor your cash flow?
- How will you keep track of your back office? Your trades? Your mistakes? Your R-multiples?
- What’s your plan for doing ongoing trading system research?
- How will you maintain your own psychological management?
7. Worst-case contingency planning.
You will need a plan for dealing with what can go wrong and how to handle it to minimize the impact of future disasters. This is what we discussed previously.
8. How will you select your trading markets?
Being a good trader in a great market is better than being a superb trader in an average market. Thus, what will you do to select your trading markets?
- Based on your personal assessment.
- Based on your big picture assessment.
9. Strategy preparation:
- Read about trading strategies related to your market.
- Logically work out what can work in that market type.
- List realistic goals for your performance.
- List your beliefs about that market.
- Determine the time frame for trading that best fits you for that market type.
- Repeat this step for each of the various market types—up, down, and sideways, under quiet and volatile conditions.
10. Strategy development
You will need to develop at least three systems that have an entry, determine your initial risk, and determine your profit taking exits. How will you do this? What ideas do you currently have?
11. How will you determine if your systems are any good and under what market types will they work?
12. What are your criteria for feeling comfortable trading a system?
Does it have to fit your beliefs? What other criteria must it meet?
13. What position sizing strategies will you use to meet your objectives?
How much time will you devote to position sizing strategy development?
14. Do a complete self-assessment.
Do you have the qualities that it takes to be successful as a trader/investor?
15. What ongoing regular self-work will you be doing to make sure that you stay on top of your game as a trader?
How much time will you spend on self-work? What will you do if you get off track psychologically? And how will you know this?
What ongoing self-work will you do physically to make sure that you stay in peak condition? Here the areas of diet and exercise are particularly important.
This article was excerpted from Dr. Van Tharp’s Kindle book “Eight Edges You Must Have: Your Written Trading Plan” available on Amazon.