Successful Trading Starts With a Business Plan

“Plan your trade and trade your plan”. You’ve probably heard that one before.  When someone utters those words, they’re often talking about planning your trading tactics. However, there is a broader directive behind that sentence, and that’s what we want to discuss today. <![if !vml]><![endif]>

To survive the rigors of futures trading, you should have a plan, a business plan. A written statement that defines why you’re trading, how you’ll trade, how you’ll manage money, what you’ll do to limit risk, and so forth. Whether you’re going to trade using order flow analysis or another strategy, if you want to make a serious run at trading futures successfully, you have to adopt a business mindset. That starts with a business plan.

Value of a trading business plan

You might have a keen eye for the markets, you might have confidence in your chosen strategies, you might have the best tools to conduct your business. But, to sustain excellent performance, you should have guidelines, requirements and benchmarks that can be followed as the market chases the unprepared from the pits. The real value of creating a trading business plan is in the process of thinking about your business in a systematic way.

When you plan out your trading practice, it helps you think things through. You’re creating a “road map” for the future of your business. Planning enables you to consider the good, the bad and the ugly about the trading ecosystem. Unfortunately, the majority of retail traders (discretionary traders like you and I) don’t create a business plan. They’re missing out on a key way to measure progress and objectively determine if and when adjustments in trading practices are needed. There is assuredly value in knowing if you are on target or at risk of not meeting goals and objectives. 

Setting a course for successful futures trading

Creating a trader’s business plan is not a task that can be completed in an hour. It can often take weeks to complete a solid, robust plan. Most of that time will be spent researching and contemplating your trading approach, ideas and assumptions. That is the value of the process, so put in the time to do the job right. Those who commit time to developing their plans never regret the effort.<![if !vml]><![endif]>

Start by reviewing a business plan template. Go through the index, review sections that need to be completed, and start where you feel most comfortable. Avoid spending hours deliberating over a mission statement, for example, if you can start somewhere else and come back to the business description section. Begin with areas that you can readily complete. If you struggle with writing clearly, jot down incomplete thoughts or bullet points then return to fill out the section.

By the time that you have completed a trading business plan, you should feel confident that you have it right, you’ve defined what your first, second, third steps are. From the plan you can start creating daily and weekly task lists.

An important point must be made before we move on to discussing plan specifics. Think of this document as a working document. While it will be your trading business road map, it is also a document that can – and should be – reviewed and updated. You will change and the market will change over time, so your business plan needs to have some flexibility built into it. Keep in mind that, at all times, this document needs to reflect the current purpose, objectives, goals and strategies of your trading business.

Key elements to a trading business plan

There are several important sections to include in your plan. Here, we’ll present an overview of these sections; in future posts, we’ll deep dive into the theories and application<![if !vml]><![endif]>

<![if !supportLists]>1.     <![endif]>Executive Summary – short (two to three paragraphs) explanation of the fundamentals of your trading business. Why are you trading, what type of trader are you (hedger, speculator), what instruments will you trade, and what will define success are a few of the points to include.

<![if !supportLists]>2.     <![endif]>Company Description – details about your trading “organization”. Include a mission statement (reason for trading), company goals and objectives, and your overall trading philosophy. Define specific goals – financial, personal, and business – which will be the milestones you want to achieve. Your objectives should be defined as destinations; for instance, a daily objective of active trading for two hours. The business philosophy should reflect what is important to your trading business.

<![if !supportLists]>3.     <![endif]>Trading Strategies – an explanation of your trading niche (which markets will you trade), capital account management  practices, daily/weekly time commitment, trade signals to be used, position sizing guidelines, stop loss policy, profit taking policy, and other strategic considerations.

<![if !supportLists]>4.     <![endif]>Trading Tactics – definitions for trading activities such as the session times you will trade, the research resources you will use, the analysis tools you’ll deploy, the feed vendor you’ll subscribe to, and other tactical considerations. What is your minimum or maximum number of contracts for a specific instrument? Include any and all daily tasks that will be devoted to trading in this section.

<![if !supportLists]>5.     <![endif]>Trading Beliefs and Experience – identify the qualities that shape you as a futures trader. What are your fundamental beliefs about the practice of trading, forecasting market activity, the amount of training and research time you’ll need? Write an honest assessment about your impression of the marketplace Remember, you don’t trade the market, you trade your beliefs about the market.

<![if !supportLists]>6.     <![endif]>Trading Psychology – an explanation of your trading mindset. Provide an assessment of what your emotional state during trading activity will be. Addressing your psychological makeup will be an invaluable tool to use when the market moves against you. Explain your trading style. Define your personality, your risk thresholds. Are you an analytical trader or a driver who runs on instinct? Are you a conservative or aggressive person? What kind of reactions do you expect to feel following good days and bad days? Include a plan on how you will handle potential psychological reactions to trade situations.

<![if !supportLists]>7.     <![endif]>Operations – a step-by-step startup and daily operational plan. Define your costs, your legal business entity, banking and trading resources, equipment, training events, initial capital, everything that contributes to your trading activities. In this section, identify a schedule that you will follow; when you will do homework such as reading news, conduct business-related activities, attend training or industry events. In addition, you’ll want to lay out your daily trading procedures including trade management and execution.

<![if !supportLists]>8.     <![endif]>Contingencies – a clear explanation of what might go wrong and the steps you will take if it happens. Explain how you will respond to a significant drawdown or if you blow up an account. Consider all the impact areas of your life if a disaster happens. By defining your Plan B, C or D, you’ll have an easier time responding.<![if !vml]><![endif]>

<![if !supportLists]>9.     <![endif]>Financial Statements – a detailed report of your current financial situation along with a trading forecast and a break-even analysis. This is an important section for two reasons: 1) going through this process allows you to take a good look at your finances (Will your account be capable of withstanding significant losses? Do you have discretionary funds available so you’re not risking essential funds?); and 2) you will create a financial roadmap for your trading business (based on the daily/weekly goals you defined in section 2. Be sure to include a monthly trading budget that you will work with, so you can keep your profits in the bank.    

The plan you ultimately roll out might have additional sections. The important point here is to really put some work into defining your trading practice as a business.

Putting together a trading business plan provides a foundation that will enable you to stay focused and really enjoy hitting the milestones you set. We’ll talk more about the business of trading in future posts. For now, roll up your sleeves and put a plan in place and place trades based on that plan.

Have you got a trading plan in place? How much time did it take to complete? Share your experience in our comment stream. Happy trading!