Business Planning

When people choose to trade the markets, they always want to rush in and get started straight away. They foolishly think that are going to miss the next “big wave.” But the market doesn’t know when you get in or when you get out. So don’t be foolish, take the time to plan. ~Mel

The entry price to being a trader or investor is fairly low. All you need is enough money to open an account. Your broker doesn’t care whether you understand expectancy or objectives. Your broker doesn’t care whether you understand that position sizing is the key to meeting your objectives. And your broker certainly doesn’t care that you must have your personal psychology in order for any of this to matter.

Your broker cares about two things:

1. That you have enough money to open an account, and,

2. That you don’t lose many times the value of your account so that the broker gets in trouble.

That’s it!

You can easily open an account without knowing the first thing about trading.

Is this true of other professions? Can you become an engineer without understanding calculus? Can you become a doctor without going to medical school? Can you be an attorney without passing the bar? Of course not.

Similarly, could you play golf against a pro the first time that you stepped on a golf course? Would you put yourself in a chess tournament against a master player if you’d never played before? If so, the worst you could do is lose a few games or your pride.

But what do people lose in the markets? Anything from a few dollars to their life savings; yet there are no rules about who should or shouldn’t be in the markets.  

Day in, day out, people jump into the markets recklessly: without experience, without training and most definitely, without any type of formal plan. In fact, your broker may not even know the real nuances and fundamentals of safe and profitable trading themselves. And more often than not, people who open a brokerage account will lose money.

If you are serious about being a good trader, then you need to approach the practice of trading with the same level of rigor with which you would approach any high level endeavor.  The market does not owe you or anyone great riches.  The market does, however, occasionally tease a large number of people with seemingly easy gains (during bubbles and other manias) only to take them away again.

Trading is a business. It’s a profession. It’s a skill to learn.

Most businesses fail because they fail to plan.

Business planning is the backbone to success.  It shows you where you’re coming from and helps you to organize your thoughts and your objectives, and come up with a plan to keep you trading successfully and in the markets for the long term.

Therefore Van recommends that every trader or investor develops a thorough business plan to guide your trading.  And even if you are trading well, he still recommends developing a planning tool.  Those who are doing well will just have a little less work to do.

Your business plan should cover all of the following areas:

• Your vision.
• Your purpose.
• Your objectives.
• A thorough self-assessment of your strengths and weakness based upon real trading logs that you collect (if you haven’t done so already).
• A thorough assessment of the big picture and the fundamentals that might be behind any trend.
• A complete understanding of your beliefs about the market.
• Procedures for getting empowering beliefs and mental states behind you.
• A documentation of your research procedure for developing new systems and determining how to analyze their effectiveness.
• Your procedures for developing and maintaining discipline.
• Your budget and cash flow systems.
• Other necessary systems such as marketing, back office record keeping, etc.
• Your worst-case contingency plan.
• System 1—which is compatible with the big picture.
• System 2—which is also compatible with the big picture.
• System 3—which might come into play should the big picture change.

If you have all of those things, then you have a chance of doing well.  But your business plan becomes a tool for you to continually use to improve yourself and your trading. 

How to Handle Hot Tips:

What happens when someone gives you a tip or idea about the market?  Do you get very excited about it and want to act?  In some cases, you probably do act.  Or, do you become skeptical and suddenly distrust the person giving you the tip?  Or do you notice if the tip fits into your game plan?  If it fits your plan, you then do more evaluation according to the criteria that you use in your plan.  If it does not fit, then you simply discard it, saying that’s not something I know much about.

The only correct response to any “hot tip” is to integrate it into your game plan for trading to see if it fits and you can evaluate it.  An improper response is to go out and buy some closed end Thai mutual fund just because “Van recommended it."

Van discusses mental rehearsal as one of the ten tasks of trading. The point of mental rehearsal is to determine what could go wrong with your trading plan and determine how to deal with it in your mind.  That way, when it does occur under the heat of battle, you are ready to deal with any distractions that might come up.  Think of the tip you received as a possible distraction.  How did you react?

This tip is a test in several ways.  First and foremost it is a test of whether or not you even have a game plan.

Do you have a plan that helps you deal with learning of a “new sure-fire can’t lose” investment you’ve heard about?  If not, then it’s time you developed one. Just do whatever it takes to develop a thorough business plan to cover your trading or investing.

Having a plan of this nature is so important that Van ranks it among his top requirements for traders.

Every outcome is preceded by a process. You will not make money trading unless you follow a predetermined plan and continually stick to that plan. That’s why you should pat yourself on the back every day if you can honestly say that you totally followed your rules throughout the day. Every "Market Wizard" arrives at that stature by taking one trade at a time. The primary difference between that person and the average trader is that the Market Wizard probably continued to follow his plan every single day. ~Van Tharp