Thursday, December 30, 2010

Business Plan—Performance

Any business plan worth its salt needs a section devoted to performance objectives and evaluation.

Objectives are what you hope to achieve with your trading. Objectives should be specific and measurable. Most traders don't bother to spell them out beyond a vague desire to "make money" or "beat the market." Some say they don't want to lose money. Each of those statements is vague. How much money? What will you do to be sure you don't blow up your account in trying to make money? How will you measure your results?

It's important to spell out objectives in the business plan. Perhaps it's to double one's money in a year. As ridiculous as that might sound, once someone knew that was their objective they'd have to figure out the best way to achieve that goal without risk of losing their capital. Doing so would require evaluating the trading methodology they used, understanding its probability for success, performing a thorough risk assessment (including all the things I wrote about in yesterday's blog), and being sure they followed the discipline to execute their plan successfully.

A reasonable objective for a new trader might be to evaluate the use of several different trading methods. They could take very tiny positions using different approaches and at the end of the year might have enough information to determine the approaches that are best for them. I personally consider paper trading a waste of time. Using real money, even if it is in small amounts, brings the trader's psychology into the picture. Another objective might be to practice a specific daily routine. This is one of my objectives—I have a list in my trading plan of what I should be doing each day. The list ranges from a self-assessment (for example, if I'm under great stress, that may impact my judgment and decision making) to updating my Point & Figure charts to calculating my daily P&L statement. I also have a checklist for weekly and monthly tasks. Another objective might be to earn a specific percentage this year. The point is that one should think through and decide what their specific objectives are.

It's also important to include how one will evaluate one's performance. This is easy with specific objectives. For example, each quarter I specify a profit target for each of the months in the upcoming quarter. I take into consideration such factors as whether I have a large amount of business travel (thus taking my focus off trading) or whether it's a slow market month (August and December are usually light months). At the end of each month, I know what my results are and I can compare them to plan. If there's a variance—positive or negative—I want to know why. I do the analysis to find out. I keep a checklist of the things I'm supposed to do each day and mark each task off. It's easy enough to scan them each week to keep track of whether I'm doing what I'm supposed to be doing. If not, why not?

I also include objectives in my plan for education and sometimes include specific books I plan to read. For example, in 2011 I know I'll be attending the MTA conference in May—it's in my plan to do so. Again—it's easy to measure my performance against such specific goals.

All of this takes work. Is it worth it? Yes, if you want to be a good trader. Good trading is the result of hard work. Hard work begins with planning that work.

© Dianne Fecteau, 2010. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.

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