One thing I learned from my study of great traders is they treat trading like a business.
They put in place systems and principles to ensure their trading runs smoothly.
So far in this course, we have been focusing on trading systems.
Your business plan is one level up from your trading plan.
You can develop your own business plan using the MarketMates template here.
While your trading plan covers the rules for placing trades, your business plan includes bigger-picture items.
Let’s look at each part of your business plan now.
Essential components of your business plan
Your business plan should cover subjects such as:
- your Mission Statement
- trading principles and values
- overall financial goals
- an overview of each of your trading strategies
- contingency planning
Let’s look at each part of your business plan now.
Your Mission Statement
Your Mission Statement is a concise summary of your core trading goals, how you will achieve them, and your greater purpose.
Here are some tips for writing a good mission statement:
- keep it short and clear. A sentence or two is ideal.
- focus on action. What will your plan do?
- use strong verbs. Words like ‘achieve,’ ‘grow,’ or ‘maximise’ convey purpose.
Make it personal. Tailor it to your unique goals and purpose.
Let’s look at an example using mine:
I include a specific, measurable goal based on what I want to return over a year:
‘To achieve consistent returns of 20% to 100% a year
Next, I state how I will achieve my goal describing my overall method:
using a ‘rules-based’ approach to trading with disciplined risk management
Followed by my greater purpose:
‘ in order to give the best life to my family, and to inspire retail traders to achieve their own goals through trading.’
Here it is in one sentence:
‘To achieve consistent returns of 20% to 100% a year using a ‘rules-based’ approach to trading with disciplined risk management, in order to give the best life to my family and to inspire retail traders to achieve their own goals through trading.’
It’s important to include your greater purpose, as it’s a powerful motivator.
I like to use the phrase ‘in order to’ and then describe the big ‘WHY’ reason for trading.
Your trading principles and values
Principles and values are the beliefs and laws that guide your behaviour in the market.
You will collect these over time as you trade.
Principles are objective truths; they can be considered unchanging laws about how trading and the markets work.
Values are like your guiding compass, they represent your fundamental beliefs about trading and the markets.
There is a crossover between the two, and it does not matter if you list something as a principle or a value.
You want to list the ideas and concepts that will guide your actions.
Learn from world leaders
The most well-known example of trading principles comes from Ray Dalio, the founder of Bridgewater, the largest hedge fund in the world.
Dalio has published several books and videos covering both principles for success and for the markets (how the markets work).
He credits the success of his hedge fund with principles such as:
- ‘radical truth’
- ‘independent thinking’
- ‘embracing reality’
- ‘continuous learning’
In your business plan, you can use a similar framework.
List down the values that you think are important to trading success.
For example, some of mine include:
- I am a risk manager first, and a trader second
- I target a risk/reward ratio of at least 1:4
- trading is about probabilities, not being right
- trade what is in front of me
- have simple entries and complex exits
- be extremely clear on the objective for each trade
Next, list down your beliefs about the principles that make the forex market work.
Here are some of mine.
- interest rates drive the direction of currencies over the long term
- bond markets provide a good indication of what the market thinks about interest rates
- prices expand from periods of low volatility into trends
- market sentiment is determined by the ‘BIG THING’ that is happening right now (such as COVID or BREXIT) and will drive price action
- support and resistance work in forex and the price will move to take out the levels
When you first start writing, your list will be small. You should come back and add more as your experience grows.
Your financial goals
Your business plan should outline your financial position and goals.
Your financial goals are different from the objectives that you have set for your trading system, although they should work together.
Your financial goals are related to the performance of all your systems, while your trading system objectives are related to one system only.
Here’s how I break down financial goals:
- Financial Freedom number: Your financial freedom number is the monthly income you need to generate to pay for your desired cost of living
- Portfolio value: This is the total amount of your investments
- Target portfolio return: This is the combined return on your trading systems
- Income: How much you make a month from trading if you hit your target portfolio return.
Let’s look at an example:
| Financial objectives | |
|---|---|
Financial Freedom Number | $5,000 |
Portfolio Value | $100,000 |
Target portfolio return/year | 20% |
Income (month) | $1667 |
In this example, your Financial Freedom number is $5000/month.
This is the theoretical number where you could stop working and trade full-time.
Your portfolio is $100,000. This may include other trading strategies outside of forex.
If you achieve a 20% return on this $100,000, you would make $20,000 in profit.
Divide $20,000 by 12 and you have your monthly income of $1667.
This puts you more than 33% of the way towards your financial freedom goal.
An overview of your trading systems
It’s helpful to summarise each trading system, allocate capital, and add the return objective from your rules-based plan.
This way you can see how your systems work together to achieve your financial goals.
While you may start with one system only, over time you could have a diversified set of trading systems, each with different capital allocations and return profiles.
Here is an example of what this section could look like.
| Trading systems | ||||
|---|---|---|---|---|
Strategy | System name | % Capital allocation | % Dollar allocation | Targeted return / year |
Forex trading (long-term) | Forex #1 | 30% | $30,000 | 20% |
Forex trading (short-term) | Forex #2 | 30% | $30,000 | 30-100% |
Growth stocks | Growth #1 | 30% | $30,000 | 20% |
Crypto trading | Crypto #1 | 10% | $10,000 | 30% |
When you total the systems together, it should match your financial goals.
Contingency Planning
Contingency planning is creating a backup plan, or a Plan B, to deal with unexpected events.
It’s a way to prepare for situations that might disrupt your normal course of trading.
It will allow you to:
- make good decisions to protect your capital if something goes wrong
- be prepared in advance, rather than solely reacting to challenging situations
- plan like the experts do
Market Wizard Tom Basso plans how to run his entire trading business off a laptop and mobile phone.
He then conducts ‘dry runs,’ where he tests his systems in the case of a disaster affecting his business.
There is a story about Tom Basso.
When a fellow trader called him, he hung up the phone, saying he was busy and needed to keep the line free, as a hurricane had hit.
The trader had not heard about a hurricane, and when he checked the weather, conditions were perfectly clear.
Apparently, Basso was conducting a dry run of his contingency plan!
List of contingencies
Here is a list of some contingencies with some example actions you can take.
Things that impact traders personally
Sickness or death of a family member or close friend: Stop trading until you are ready to trade again.
Emergency with your family which arises when you are trading: Close all positions. Assess whether trading should resume or be put on hold.
Things that affect your environment
Noise in your environment: Put on a headset. Consider moving to another place.
Events related to your broker
Your broker has an outage: Ensure you have a backup broker in advance. Contact the broker to review any losses resulting from the outage.
Problems with equipment
Your charting program goes down: Ensure your charts are set up on a second platform in advance. Switch to a different charting platform.
Your computer goes down: Switch to a backup computer or mobile platform.
Laws and regulatory changes
Margin requirements are changed: Assess the impact on your trading system. You may need to open an account with a different broker.
Market disasters
Unscheduled major news event occurs when in a position: Close the position. Alternatively, it may make sense to hold and wait for the bounce.
Trading system disasters
The system performs dramatically outside of expectations: Stop and assess the system.
Psychological problems
You trade with below 90% efficiency (i.e. you are making mistakes): Some traders may decide to get an accountability partner to discuss this with. Otherwise, you could stop trading and assess the reason for the mistakes.
Environment disasters
Earthquake, flood, hurricane, or other disaster: Stop trading. Assess the potential for power to return, and if it is safe to remain in the environment. If it is not safe, then move to a safe location.
Own your trading business
By treating your trading like a business, and implementing a well-defined business plan, you can gain a significant advantage in the markets.
Your business plan provides a roadmap to navigate the challenges and opportunities you’ll encounter.
It keeps you focused on your long-term goals, and reminds you of the core principles that guide your trading decisions.
It also helps mitigate risks by establishing contingency plans for unexpected events.
Remember, your business plan is a living document.
Review and update it regularly as your experience grows and market conditions change.
With a solid plan and a disciplined approach, you are well on your way to achieving your trading goals.
Happy trading!
Till next time,
Sources
Marketmates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
- Ray Dalio – Founder of hedge fund Bridgewater https://www.bridgewater.com/
- Tom Basso – Market Wizard, now author and trading coach https://enjoytheride.world/
- Dr Van K. Tharp – inventor of the concept of Financial Freedom number in Trade your Way to Financial Freedom https://www.amazon.com/Trade-Your-Way-Financial-Freedom/
