December 7, 2017

By, Dale Brethauer

This will be a three-part series on developing a trading business plan.  This is a principle that separates successful traders from the wanna-be overnight millionaires, that are really just gamblers at a casino, and the house always wins.  However,  with the right foundation and strategies in place you can become the house, I can show you how, lets get started.

Crucial Trading Principle

The number one reason why small businesses fail is they don’t have a plan. They’ve got a good idea and they take it so far, but they don’t have a plan of where they’re going to go from that point on.

You need to treat trading like a business and you need a business plan. You need to have rules. You need to follow the rules. That’s what we’re going to develop with your trading business plan.

This is going to be an evergreen document.  As you become more successful you might want to modify a couple of things.


I first presented this topic at the Trader’s Expo in Las Vegas in November of 2009. This was greatly appreciated by a lot of the people. I’ve taught it to my mentees over many years, and I have recently modified it to bring everything up to date for you people that are now listening.


One of the first things we will do is study losing traders. This was a study that came out of a book by Dr. Van Tharp. I attended one of Dr. Van Tharp’s seminars. It was a weeklong seminar. He taught me a lot about the psychology, about how to handle my ego, about how to look at realistic goals. I give him a lot of credit. He is the author of ‘Trade Your Way to Financial Freedom’. If you don’t have that book, I highly suggest you get a copy of it. You can go onto Amazon. It’s relatively inexpensive. It’s a fun read, and it’s just jam-packed with good information.

Dr. Van Tharp is not a trader per se. He’s a psychologist who works with traders and investors and helps them to become the best they can be. If we take a look at the list of losing traders and what they do, I don’t think you’ll be surprised. Take note, with your trading, do you have all these items?


Why Traders Lose


The trader has not set goals


I think this is very common with a lot of new people that get into investing. They pick up a Wall Street Journal. They look at a chart. Of course, we always trade on the right-hand side of the chart where we don’t know what’s going to be happening in the future.
It’s very easy to look at a chart in the middle and say, “Oh, I would have sold there”, or “I would have bought there”, and they just start. They have no goal in mind. They just want to make a lot of money. Well, what is the goal? You need a goal.


Unrealistic Expectations

An excited prospective trader starts with a very small account and expects to quit their day job and become a millionaire trading the stock market...tomorrow. Very unrealistic expectations. You need to have realistic expectations. You need to be willing to put in the time and the effort in the beginning stages for it to become effortless later on. if this turns you off then your money is better used elsewhere.

There was a book written called ‘Outliers’ that talks about any professional needs to put in about 10,000 hours in their profession to become great. You wouldn’t expect to read a book on brain surgery over the weekend and perform your first surgery on Monday, but a lot of people go to the library or the bookstore or Amazon and pick up a book on stock market trading and read it over the weekend and say, “I got it. I’m going to trade for a living”.

You have to have realistic expectations. Unfortunately, a lot of people consider the stock market as a big casino. They have a need for action, and that kills them. You need to be patient. Don’t let the market trade you. You trade the market when you know you have an edge.


Poor Risk Management


The third reason for losing is exposure to too much risk. Too much money is allocated to any given trade. If it goes against them, they possibly jump out of the trade prematurely. If it goes with them, they’re too quick to take profits because they have so much invested. They’re exposing themselves to so much risk. There is so much anxiety. They jump and they’re quick to take profits and they let their losses run.


Lack of Confidence


The fourth reason is people have a lack of confidence and it stems from no plan, no system, no rules.  I’m a professional. I’ve been doing this for 35+ years and I have losing trades. I have a string of losing trades, and it does not shake my confidence at all.  I embrace them because that’s part of trading and those loses are already built into my models.  Conversely, when I have a 5, 10, 15, winners in a row I do not think I'm god to the markets either.


Records and Back Testing


The fifth reason traders fail is because there are no rules in place and no records. Why did that trade go bad? Write it down. If those rules are back-tested, are paper traded and then are traded with real money and they work, those are the rules that you have to follow.


Lack of Strategy & Systems


The sixth and final reason traders lost is that they start without a strategy.  No system in place that designates, prior to entering a trade, what the course of action is if its a loser, if its a winner, if its break even.  What defines a trader is our ability to grab value so how will you do that when your emotions kick in during these trades.  Emotionless,  Planned, trading is the path to success.


Jack Schwager Got is Right

Jack Schwager says in his book, ‘The Market Wizards’ - which is an exceptional book that you ought to pick up too - he interviews a lot of very successful traders, he says the number one reason that people lose is they don’t have a trading plan. Well, the next three webinars, that’s what I’m going to teach you. This is just a framework for you to go by. You can expand yours as much as possible.

Now, in Schwager’s book, he says, “Trying to win in the markets without a trading plan is like trying to build a house without blueprints. Costly mistakes are inevitable. If you do have a plan, those mistakes are avoidable”. He goes on to say a trading plan simply requires combining a personal trading strategy with specific money management and trade entry and exit rules. Those are three very, very important elements.


Your Trading Business Plan | Overview


I’m going to go a little bit further with my trading plan. I’m going to look into all the reasons why traders lose and try to develop a strategy to get around the losing mentality. My trading plan, the elements are, you need to have goals. That knocks the first one reason for losing. Those goals need to be affirmations. You need to tell yourself. You need to write down what your goals are and how you’re going to obtain them. Reinforce that daily by saying them aloud. Make your grey matter believe what you’re doing.

Next you need to have realistic expectations. How much money do you really need from the market? What is your objective in being in the market? What are your realistic expectations? We don’t want to go to the casino. Casinos are all over nowadays. Just walk into a casino, put it on red and black and get your need for action out of the way.

The stock market is not a gambling house. Those who gamble lose. You don’t want to expose yourself to too much risk. Therefore, I’ve developed a number of rules to determine, for your given portfolio, what should be your maximum trade size to trade like a professional?

When you start doing these things and you start seeing your equity curve going up, your confidence is going to grow.

Next, you need rules. You need trading rules. They can be simple rules, but you need to have rules. A lot of these that I’m going to show you, it’s things that I have developed. Some of them I’ve changed the numbers and so forth, but I want to give you an example of how you might put this together.

You need to go on your own path and make sure that the trading business plan fits your trading needs. You need a strategy. What are you going to do? Are you going to buy when the stock is oversold? What does that mean? Are you going to sell when it’s overbought? What does that mean? When are you going to get out? You need trading strategies.

Then I’m going to show you how I structure my portfolio. My portfolio is mostly in stock and trading the S&P 500 ETF and also the RUT and some of the big indices. Then finally, we’re going to talk about the learning curve.

Start out with paper trading. When you’re making money paper trading, you’re ready to invest your hard-earned money.


Successful Trading Tactics | Overview

You can see that the trading business plan elements that I’ve defined here are aimed at attacking all the problems that losing traders have.

Part one:  Goals and Affirmations, Most Losing Traders skip this step..

Goals and affirmations. I believe this is the beginning phase of what you need to further develop your strategies and how you’re going to tackle this. You need to know why you’re in the market, you need to have affirmations and you need to convince your grey matter that those affirmations will come to fruition.

Part two: Trading Strategies

Trading strategies, the trading rules and trade size to manage your money.

Part three:  Portfolio Structure & System Deployment 

Demonstrate how you should structure your portfolio as you grow and the very important learning curve.


Part 1:  Goals & Affirmations

Let’s go ahead and talk about the goals and affirmations. For your goal, I want you to determine a specific monetary amount that you desire on a yearly basis. Think about your financial situation. Think about what would make a big change in your lifestyle for the better. Not “I want to hit the lottery” and who knows what you’re going to do with the winnings. I want you to think about the stock market as a vehicle to fulfill your goal, to benefit you financially.

I want you to be realistic. Here I’m just giving an example of saying, “Well, $5,000 a month would pay for my monthly expenses”. If that’s the case, that is a fantastic goal. That is something that is obtainable if you put the time and the effort into it.

Let’s say your goal is “I want to make $5,000 per month or $60,000 per year in the stock market”. Realizing that it’s not going to be a straight line up, you’re not going to be able to say “At the end of this month I made $5,000 I’ll put it in the bank. Then the next month I’m making…” No. You’re going to have an equity curve that is going to go up and down.  Sometimes you’ll make more than your goal, sometimes you’ll bank less than that.

You want an equity curve that goes up nice and smooth so that on average you can pull out some money to help you in your financial situation. Make this a realistic goal. Take time. Think about it. Talk to your significant other. What makes sense? What would really help you? Be in this together. Set down a specific monetary goal.

For the time being, don’t worry about how much you have and how you’re going to do that. What I want you to do is determine the ultimate goal that will make you financially free. Once you have that goal in mind, I want you to write it down on paper. Then I want you to write a focused affirmation based on where you’re at today.

Now, let’s say you’ve only got a $30,000 portfolio or any amount that you have. Remember, we want to make $60,000 a year. Well, how are you going to do that on just a $30,000 portfolio? You’re not going to double your money year after year after year. That’s unrealistic. This is not going to happen. Let’s get realistic.

Your affirmation might be, “I will be a consistently successful trader”. Well, that’s all well and good, but how? How are you going to do that? Better to say “I’m going to have a goal of $1,500 per month. Now, I’m going to use that to build up my portfolio to the point where I can consistently make $5,000”.

You’ll be able to put a curve together and that’s going to be about 10 years. At that time it’s going to require this amount of money for my portfolio. Now you have a long-term goal. It’s a realistic goal. It’s not going to happen overnight. I’m going to learn as I’m going through here. I’m going to give myself time to reach my ultimate goal. How am I going to do that? I’m going to trade the SPX indices and I’m going to do directional credit spreads. Okay.

Now let’s look at this affirmation. This affirmation says that you’re going to be consistently successful. This is your immediate goal, realizing you’re not going to make that every month. You’re going to slowly build your account, and you’re in no hurry because you’re learning, you’re building and ultimately this is where you want to go. You’ve got time to do that. These are the two vehicles you’re going to use to get there.

Now, you have an affirmation that is tied to your goal that you can now tell yourself. I want you to write this down. I’ve been doing this for many years, and I change on a regular basis. I started many years ago, and I’ve got so many iterations of my goal because my goal has changed over the years. You want it to be evergreen.

There are other things that I’ve completely missed on my affirmation. But, in retrospect it’s better that I had them because they absolutely had an adjacent impact on my success.

Think of your affirmations as an evergreen document. Make sure it’s realistic. Write it down. Say it to yourself. Make your grey matter remember it, and you’ll be well on your way to being a success in the stock market. Those are the first two elements of your trading business plan. What is your goal? What are your affirmations?

That’s part one of my trading business plan webinar. I look forward to continuing this in part two. Part two, we’re going to be talking about trading strategies and the rules around those trading strategies. That’s a very important portion. It’s a continuation of this base that we’re developing here on part one.

If you have any questions please go to the website, click on contact in the upper right hand corner, and send us a message.