How Traders Need to Prepare for Their Mission
If you don’t know where you are going…then any road will get your there (Lewis Carroll – Alice in Wonderland)
This famous quote strikes a chord. It is very necessary for us as traders to consider our purpose and our reasons for being a trader. It is also very important to have a long term mission statement that will become the map we follow in order to bring us to our desired end results.
Most traders have at some time or the other, heard the expression, “Plan your trade then trade your plan.” This is essential advice for any trader to heed, before jumping into a position in the market. But there is a much longer term connotation to planning that I want to address in this article. It deals with the trader’s MISSION statement.
In order to accurately build your mission, you need to know the four basic trading profiles.
Trading Profile 1. If you want to trade part time to make a little extra cash then this profile is the one for you. This may be appropriate if you have a full time job and can only trade occasionally to supplement your income. Your objective here is to provide extra cash for your personal requirements.
Trading Profile 2. In this profile you want to trade to enhance the performance of your own retirement fund, such as your 401(K) plan or similar. Here your objective is not to take out the profits but rather to build wealth over a longer term.
Trading Profile 3. In this profile you want to trade for a living. Your goal is to earn your monthly income by becoming a full time trader. Your objective is to generate spendable income each month that is sufficient to cover your lifestyle.
Trading Profile 4. Eventually you may want to offer your expertise as a trader on behalf of others. In this scenario your goal is to provide better than average returns for your clients and to earn a fee or percentage of the profits that you generate.
A Series of Questions That Every Full Time Trader Should Ask Himself
As you can imagine, each of the above trading profiles require completely different approaches. Therefore, it is important that you pick your fit “upfront” and then focus on the specific requirements needed in each of the profiles in order to build your mission statement accordingly.
Hence, it is important to know where you fit as a trader and what you want to achieve, both in the short term and over the long term.
The first step is knowing your goals and how much money you will require to achieve them is.
For the purpose of this article, let us assume that your chosen fit is Profile 3. You have decided that you want to trade full time for a living.
In defining your mission statement, you need to outline exactly how you intend to reach your goals. So first let us define the goals you are trying to reach. Ask yourself the following questions;
Step 1: Know what you need to earn.
Q: How much money do I need to take home each month, after taxes, that will be sufficient to cover my expenses and savings?
After doing your budget, assume that you need $14,000 per month gross. Assume your tax rate to be 30%, (please check with your tax advisor), in which case your annual cash requirement would be $14,000 X 12 = $168,000. Deduct taxes of 30% or $50,400 = $117,600 net. This equates to $9800 per month.
If you trade 20 days per month on average, you will need to make $700.00 per day.
Let us move to the next step to see what we need to consider in order to earn $700 each and every day.
Step 2: What kind of methodology must I employ?
This step will help you better understand what you need to consider in order to earn $700 each and every day.
Answer these questions to get a sense of your planning.
Q: Do I have a methodology that I can use over and over again? (It must be the same exact strategy for entering each trade; do not mix systems for this exercise.) If you have more than one trading system or strategy, repeat the exercise separately for each one.
Q: How well does my methodology perform?
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Out of the past 20 trades how many were winners?
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How many were losers?
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What was the average win (total profits for the winning trades divided by the number of winning trades)?
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What was the average loss (total losses for the losing trades divided by the number of losing trades)?
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What is the average profit made per trade?
Once you have a sense of your methodology’s “expectancy”, then it’s time to move on to the next step.
Step 3: How much trading do I need to do each day?
Q: Based on the above numbers, if I require $10,000 per month, how many trades do I need to make to earn $10,000?
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In my trading system, 12 trades were profitable and 8 were losing. The 12 trades made $3600 or an average of $300 per trade. The 8 losing trades lost a total of $960 or an average of $120 per trade. Therefore over twenty trades I made $3600 – $960 = $2640. This is an average of $132.00 per trade.
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If I need to make $700 per day, I need to trade 5 or 6 times per day, each and every day.
Hopefully, there is an opportunity to find 5 or 6 trades each and every day. If this is one of my goals, I now know what I have to achieve.
But our analysis is not yet complete. In the next step we need to calculate how much capital we need based on our risk profile and the specific market that we intend to trade.
Step 4: How much can I risk per trade?
Since we know that we have 12 winning trades and 8 losing trades out of every 20 trades we make, and that our winning trades are 2.5 times as profitable as our losing trades, we know that we have a profitable trading system.
Therefore, if we put our system to work enough times, we should be able to achieve our goals. Also we know that we win more than we lose and therefore, we can increase our risk appetite a little.
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Instead of only risking 2% of our trading capital per trade, we are prepared to increase the risk per trade to a maximum of 5%. At 2% risk we would have to lose 50 times in a row to wipe out our capital. At 5% we would have to lose 20 times in a row. We believe our system would not have such a string of losing trades, and therefore, we can safely assume the higher risk.
Now we have to ask ourselves the following questions;
Step 5: How much capital do I need?
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If I am prepared to risk up to 5% of my capital per trade, and my average loss is $120, how much capital do I need to start my trading account? To calculate this number I divide the average loss by the %risk. So $120 / 5% = $2400. This would be enough margin to cover two standard lots approximately, but since I will need a cushion in my account, I need to double the amount to $5000.
Step 6: Which market could provide the opportunity to realize my goals?
Since I need to make about $700 per day, I will need some leverage to effectively make it possible to earn $700 from relatively small moves. If I wait for large moves, I might not find enough trading opportunities every day.
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Now I have to choose the market in which I wish to trade. Since I need to earn about $700 a day and to do this I need to take as many as 6 trades per day, I believe that the spot cash Forex markets with 100:1 leverage will be my best choice.
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Observing the Forex markets, I discover that each pip that the currency moves is worth about $10 and to trade that currency, I need to buy or sell a standard lot of 100,000 units. I will need to make about 80 pips per trade or 20 pips in four trades to achieve my goals. It is always important to keep stop loss orders in the market. Sometimes you may have to make more than one attempt at a trade, so don’t forget to take the stops losses into account.
Once you do this exercise, you will begin to treat trading like a business. You will have targets that you must reach, and you will have expenses such as transaction costs to take into account. It is critically important that you know how to execute your strategy to consistently give you a profit.
You will need to keep impeccable records so you can refine your trading skills and develop positive feedback loops. (See my previous article regarding positive feedback loops). In short by applying your mind to the design of a mission statement for your trading business, you will be building a professional trader’s mindset, which is the only way to become successful. Planning and preparation are important steps in becoming a trader, both for the short term trade, as well as the long term goals of your trading business.
So far in this series, we have discussed the need to apply a Six Sigma approach to trading. Six Sigma is a statistical concept that suggests we aim for 100% flawless execution of our strategy rather than search for an elusive Holy Grail system that wins 100% of the time. We can learn to execute well but I doubt that we will ever find a 100% winning system. By learning to execute well, over and over, we begin to create positive feedback loops. This leads to confidence and the ability to “pull the trigger” when we need to. Add this positive mindset to a well designed mission and we are on the road to building a successful trading business.
In this article, I touched upon three important factors in the Fusion Trading Model, which I teach; the amount of money that we need, the type of market to trade and the methodology to employ. In the next article I will go into more depth about the combination of all three.
Selwyn Gishen is a trader with over fifteen years experience trading forex and equities for a private equity fund. He is also a student of metaphysics for over thirty five years. He has written a book called “Mind – How Changing Your Mind, Can Change Your Life!”
Selwyn is the founder of FXNewsandViews.Com and the author of Trading the Forex Markets – A Foundation Course for Online Traders. The course is designed to provide the trader with all the aspects of the Fusion Trading Model. More informationabout Fusion Trading can be found at www.fxnewsandviews.com.
You can reach Selwyn at Selwyn@FxNewsandViews.com.