A Business Plan, Different to a Trading Plan, Part 1

Trading is a business. A business needs a business plan once you get to CP.

The business plan is different to the trading plan. The trading plan is the detailed way you go about trading a particular market(s) and periodicity including the trade and risk management. A business plan is a plan how to conduct and grow your business.

While most traders have now finally "got it" that they need a trading plan, most still don't have a business plan. The business plan is not talked about so much as most traders are still trying to reach their first goal of CP.

So what's in a business plan? The starting point is the same thing that's in most business plans, an analysis of costs and the profits that are required to hit breakeven taking into account all expenses (even living expenses for a trader).  The second part of the business plan is describing the actions required to meet those costs.

For example, a trader starting out in business may plan:

Costs per month

Data                                                        120

Platform                                                    50

Rent & Utilities                                      1,500

Car Expenses                                          500

Education                                               200

Various                                                  930

TOTAL                                                3,300

Income

Breakeven @ 165/day for 20 days        3,300

Requirement

Trade 2 contracts ES per trade to earn average 1.5 points per trade as per my trading plan for ES day trading.

This busines plan  provides a goal as well as an assurance, if met, that the trader has a business. Income surpasses expenses. As the business develops, goalls change and the business plan is updated.

OK. Now you are a successful trader with a number of dependents and a higher level of expenses and income and the business is growing substantially, what sort of business plan might be prudent to protect both income and assets. This was something I took a lot of time over and still do. I'll write the second part of this post soon.

The Ever Evolving Trader

The road to consistent profitability is to find something that works and then do it over and over again.

This doesn't mean that you do EXACTLY the same thing for ever as markets are evolving, particularly as technology and the economic climate changes.

To meet these changes, we must subtly tweek our successful methodology.

How do we know that its necessary to tweek and how do we make the tweeks?

We know that it's necessary because we keep detailed records of our trades in either a spreadsheet or in a program like MSA. By knowing the profile of our trading, we can see statistical changes taking place. We then go back to our charts and look at the trades and see where the issue is.

Once we have an idea of the changes taking place, we go back to our trading app and rerun the algo that we use to test our methodology - assuming we have been clever enough to create a model of our trading.

Creating a trading module - an algorithmic represntation of how we trade our pictures/ setups is cnow necessay, even if we are discretionary traders. We need to test the effectiveness of our entries and exits. If the math doesn't work we can't be CP.

For me, alogorithmic testing is the starting point of a new idea. Without this, it can be just guessing. Looking at the number of traders who don't use algos for working out their methodology gives you an idea of why most traders lose.

Automated Trading

We have been actively trading Flo for a long time now have a lot of experience and statistics available.

It is my strongest belief that as the markets have changed and continue to evolve with technology, the way for traders to now succeed (succeed = to make consistent profits) is to use rule based, back and forward tested, methodology.

Having interacted and/or mentored with hundreds of traders, I believe that traders fail because of a lack of a properly tested trading plan or a failure to follow a trading plan.

The medicine for this, I believe, is to trade using an algo. The very act of properly creating, testing and using an algo means that there is a properly created and tested trading plan which is adhered to.

Trading is a business of probabilities. When we see "A" there is a predominance of probability that "B" happens. We then wrap money management around this and we have consistent probability.

The least important part of all this is what "A" is. There are millions of "A"s that result in high probability "B"s. It is NOT difficult to create a consistently profitable algo.

What is more difficult is to create a consistently profitable algo with the average trade size and drawdowns that do not cause the trader to turn the algo off. That means the trader needs to find an "A" that fits his trading DNA.

The basis of finding an answer to this question is determining a couple of basics:

• Are you an inside out or outside in trader or both

• What size of swings/oscillations do you want to trade taking into account that the markets moves in thrusts and pullbacks during the trade

Algo trading and HFT trading is increasing exponentially, not just because of the speed required but also because a single trader can trade a"portfolio" of markets thereby smoothing out his equity curve.

While HFT implementing HFT is beyond the pockets of most retail traders, MFT (Medium Frequency Trading) is definitely not. MFT involves scalping the market with automation. Why MFT?

1. Very high win rate due to small profit targets
2. Reduced risk as the trader is in a trade for a short time albeit many times a day
3. Triggers on easily identified bursts of order flow and momentum
4. Using an algo means the trader needs to be smart once - creating the algo -not smart for every entry and exit.
5. Your trading plan can be both back tested and forward walked so that you can be as certain as possible that Consistent Profitability (CP) is there, all before any money is risked

The methodology is still the same: inside out trades identify the trend and trade the pullbacks in the direction of the trend. Outside in trades identify extremes and fade moves to revert to the mean or better.

My tool of choice has been MultiCharts but there is now something new for someone who cannot or does not want to get involved with programming. This something new is BLOODHOUND, an add-in to Ninjatrader. BLOODHOUND is a tool box of logic and solver modules that can be picked and clicked and put together like a Lego model to create both signals and strategies that can be fully or hybrid autotraded. I've been working on porting Flo over to BLOODHOUND since the end of May and the results are looking pretty good. I'll post more on this in the future. In the mean time, click the BLOODHOUND link and have a look at their videos.