Your Goldman Sachs Trading Plan
January 18, 2018 - Design a Plan Even
Goldman Sachs Might Envy By Dr. Van Tharp Trading Education Institute
“A good plan, executed now, is better than a perfect plan next week.” — General George S. Patton
Imagine that you have several friends and they know someone who started up a neighborhood grocery store, and they’re making a killing. That sounds good to you, and you’ve always craved the independence of working for yourself, so you decide you're going to start a brand new grocery store business. But you need to borrow some money to get things going. You call a few suppliers and you find out how much your inventory is going to cost. (Stuff like milk, break, eggs and butter.) There's a small storefront on a nearby corner for rent and you figure you can rent the building pretty cheap.
Armed with this knowledge, you go to your bank and you say, “Ms. Banker, there are little grocery stores everywhere and I think I can make money in the grocery store business, too. After all, I can buy lots of basic staple items. Sometimes I can buy them for less than my competition; sometimes I have to pay a bit more. The bottom line is I think I can sell them for more than I pay for them. After all, that's how you make money, isn’t it? Also, I can rent this little building down on the corner near my house. My overhead will be pretty low because the rent is cheap and I won't have to drive very far to work. I just need some shelving, a cash register, a cooler and a telephone line. Add in some paper bags with my store name on them, and I'll be ready to go. What I’d like to know is, would you please loan me $100,000 so I can open my grocery store?”
What do you think the chances are of the bank loaning you the money based upon your “business plan?” Good? Not so good? If you have any business experience at all, you'll understand that the banker's probably going to laugh you right out of the door. Not only will she not give you the loan, she'll probably strongly suggest that you stop wasting your time and hers. No banker will loan money for a poor, sloppily planned, totally off-the-cuff “business idea.” And yet, that's how most aspiring day traders approach their business.
They see mesmerizing ads on television, where everyone, including the kindly Granny next door, is making (it seems) a killing by day trading. They may have a friend who has done a little on-line trading. They have a little bit of money to trade, maybe $10,000, maybe $20,000. They can easily download the trading software through the Internet. It's pretty simple to open up a trading account. So, enthralled by the promise of easy riches, they open up a trading account, deposit $20,000 and they're in business!
Little do they realize that they’ve just set themselves up to compete against some of the best financed and best managed trading companies in the world--companies such as Merrill Lynch, Goldman Sachs and Morgan Stanley. Not to mention the fact that they’ll also be trading against many highly skilled private market makers and traders.
Now put yourself in this situation. What do you think your chances as a trader are against that kind of competition? Do you think your chances of survival are good or not? If you think that your chances are good and that you're going to make money, why do you think that?
You probably realize how ridiculous this proposition is. Even if you have very little practical business experience, you intuitively know that this kind of “plan” is going to fail. Your new “store” is going to get crushed by the competition. Yet, primarily because of, “success stories,” (a buddy knows a buddy that's made some money,) and because of advertising and the fact that the media has so convinced you that it’s easy to trade, you think you're going to open up your little trading shop and compete with Goldman Sachs. Well, I can tell you that you're not. At least you're not going to make any money. Not at first anyway. And especially not without a business plan and a trading plan that clearly define and explain exactly how you’ll thrive in the face of such fierce competition.
How to Create a Dynamite Plan
One of the things that I've found is that many people really don't understand the function of a business plan. So, before we talk about what a business plan is, let’s talk about what it is not. A big misconception I often hear is that a business plan is about some new and brilliant idea… an idea that will revolutionize or change the marketplace in some way. It isn’t. We've all heard countless stories of clever people inventing new products or services and becoming hugely wealthy through this new idea. More often than not hundreds or maybe even thousands of people have already conceived the same idea. While it’s fine to have a good idea, that isn't the most important part of the plan. What is most important is the execution of the idea. And that's what a business plan really is...a written document that shows how to turn any idea or concept into a profitable venture.
Trading is one of the oldest concepts on the planet and that’s an advantage to your new business. You don’t have to reinvent the wheel. What you have to do now is create a written set of instructions to your brain. Instructions that will turn your concepts into cash. Think of your business plan as Cliff Notes on “How to make money by trading!” because that’s what it will be once it is completed. Since only the best traders have the discipline to make such a plan, you’ll have one of the “edges” you need to compete alongside the top market makers and traders.
For most people, writing a business and trading plan is about as much fun as having a root canal. Another issue is that most traders have very little if any b-school or business background. If this describes you, you may not have been exposed to the disciplines of writing a business or trading plan. And you may consider it pure drudgery!
But before you despair, remember that these plans are vital guides along the path to long-term profitability. Also focus on the fact that even though some traders have a trading plan, which dictates what they do day-in and day-out, they can't distinguish between daily trading and running their business profitably. They are so close to the trading activity that they can’t see the big picture. The problem is, they never step back and get a large enough perspective to see where the trading is taking them from a business standpoint, and how their trading fits into their overall mission.
To get started, here’s an outline of a good business plan for your trading business. This plan is very similar in structure to many excellent business plans you might find in b-schools or corporations large and small. It includes ALL major areas for planning and running any profitable business. Notice that it goes far beyond a typical trading plan. In fact the “trading plan” is only one subset of the overall business structure. Most business plans would include a section on “Strategy & Implementation.” Such a section might include the following subtopics: Market Opportunity, Business Strategy, Service Implementation and Marketing Strategy. Since the “Strategy & Implementation” section of a business plan is all about income production and a Trading Plan deals with the same issues, a trader would substitute “Trading Plan” for “Strategy & Implementation.”
So what business planning for a trader really boils down to is the following.
A business plan is a well thought out, written document which deals with the marshaling of four primary resources — time, equipment, capital, and talent. Constructing the plan involves taking an inventory of your resources and then describing in detail how you're going to use those resources to generate cash flow. And remember, having a working business plan will put you in the elite company of the top traders that are already living their promise.
This is a very brief overview of a project that requires a lot of thought from you. Every plan is unique. Here are VTIs resources for more information.
Chapter Three from Financial-Freedom Through Electronic Day Trading
Business Planning For Traders and Investors an Mp3 Audio Program in which Van Tharp interviews a variety of special guests and provides you with exercises designed to assist you in preparing your plan as the series progresses.
The most comprehensive and thorough approach we offer is the Blueprint for Trading Success Workshop. We only have this highly specialized workshop once in the US and once internationally each year. Catch this workshop in February in the US and October in London in 2018.
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