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The advantages of adopting a
business type organization towards trading are:
1.Creates a disciplined and professional trading environment.
2.Provides the framework required to identify and capitalize on
trading
strengths and minimize or eliminate trading weaknesses.
3.Significantly reduces the psychological problems of fear, greed and
uncertainty by providing the most valuable commodity any trader or
business manager can possess.........information. Without access
to
properly structured information, it is impossible to intelligently
manage any
type of business activity.
If you agree that trading is a business, then you must organize your
trading
activities similar to the way all successful businesses are
structured........which is
the Profit Center type structure of business organization. Profit
Centers segregate
revenues and expenses by product line. For example, a grocery store may
maintain separate Profit Centers for Frozen Foods, Dairy Products,
Canned
Goods, etc.
As another example, a shoe store may create Profit Centers for Men's
Shoes,
Women's Shoes, Formal Shoes, Sneakers etc. For instance, the store
owner
purchases 50 pair of men's shoes for $20 a pair and sells all 50 pair
for $50 a
pair, he will enter the $1000 purchase cost, $2500 revenue and
resulting $1500
Net Income into the Men's Shoes Profit Center. He also purchases 50
pair of
women's shoes for $30 a pair but can only sell 5 pair for $50 a pair.
He enters the
$1500 purchase cost, $250 revenue and $1250 Net Loss into the Women's
Shoes Profit Center.
In this manner, the store owner knows which type of shoes are producing
a profit,
which shoes are generating losses, which shoes to buy more of, which
shoes to
discontinue selling etc. Without properly organized information which
reflects the
business activity of his store, the owner is managing his business
activities in the
dark......... and it is easy to see how the psychological problems of
uncertainty,
fear and greed quickly enter into the picture. Which shoes are selling
well, which
shoes are not? Should I raise or lower the sales price? Am I paying too
much for
the shoes? Why are some shoes selling well and others are not? The
owner is
unsure as to what do, when to do it and why he his doing what he does.
The above examples are simplistic but the same basic idea is utilized
by every
business, especially industries with very distinct product lines such
as the
automobile and steel industries.
The same concepts applies to the trading arena. Every trader, wether he
likes it or
not, will be involved in activities which can be segregated along
Profit Centers.
Before the first trade is taken, the trader should spend much time in
reflection as
to how he will organize his trading operations. How will you manage
your trading
business? How will you monitor your trading performance? How will you
identify
and capitalize on trading strengths and eliminate trading weaknesses?
Will you be
operating in the dark or will your trading decisions be educated,
informed,
disciplined and confident? What type of statistics are required to
properly manage
your business?
Have you asked yourself those questions?
If trading is a business, how can you hope to succeed if you do not
have a business plan
or business type organization? If you are not organized, then you will
be .....disorganized.
To remedy this situation, here are some ideas as to how to structure a
trading business
organization.
The trading business organization consists of a Profit Center type
structure
arranged in a heirarchy. I will give a few examples to illustrate the
concept. Our
first hypothetical trader is long term ( 2 weeks or longer in a trade )
and trades
futures only. He uses two trading methods, a breakout system and a
moving
average system. He only trades Beans and the Swiss Franc. After much
thought,
he creates the following business organization. At the top of the
heirarchy is a
Profit Center named GLOBAL in which he enters every trade he makes
regardless of trading system or future traded. Then he creates a Profit
Center for
BEANS and another for SWISS to segregate his Soybean and Swiss Franc
trades. He also creates a Profit Center named BOTSY for all his
breakout trading
system trades ( Beans and Swiss trades ) and another Profit Center
named
MATSY for all his moving average trading system trades ( Beans and
Swiss
trades ).
Finally, he creates Profit Centers named BOTSYBEANS, BOTSYSWISS,
MATSYBEANS and MATSYSWISS. These Centers segregate trades by the
trading system used and the future traded. For instance, the MATSYBEANS
Center contains all trades for Beans taken from the moving average
trading
system.
His trading business organization looks like this:
GLOBAL
BEANS
SWISS
BOTSY
MATSY
BOTSYBEANS
BOTSYSWISS
MATSYBEANS
MATSYSWISS
Notice that the trader is able to monitor his trading performance on a
macro
(GLOBAL) level as well as an individual future level, individual
trading system
level and a trading system/future level. Just by taking the time to
develop this
simple organizational structure, the trader has "forced" himself to
conceptualize
how he plans to organize, evaluate and manage his trading business. He
has
decided to become involved in the business of trading so he first has
developed
his business plan and business organization before he makes his first
trade.
When a trade is closed out, the trade information is entered into the
appropriate
Profit Centers. For example, on 7/10/98, a Bean trade is closed out
from a signal
generated by the break out trading system. Two contracts are traded at
a
commission of $50 and the trade shows a $1,000 profit when closed out.
The following trade information is entered:
Date trade closed out
7/10/98
Name of trade
Beans
$profit or loss
+ 1,000
Number traded
2
Commission
50
This trade information is entered into the following Profit Centers:
GLOBAL
BEANS
BOTSY
BOTSYBEANS
The GLOBAL Center contains all his trades, regardless of future or
trading
system. The BEANS Center contains all his Beans trades regardless of
trading
system. The BOTSY Center contains all his breakout trades, both Beans
and
Swiss. Lastly, the BOTSYBEANS Center contains all his breakout trades
for
Beans only.
Since each Profit Center is a separate business, each Center requires
an Initial
Capital to accommodate margin requirements and trading losses. I will
describe
how to allocate Initial Capital to Profit Centers in my next article.
In this example,
let's assume that the trader capitalizes each Profit Center with
$50,000.
Therefore, in the four Profit Centers where the trader entered the
$1,000
profitable Bean trade and $50 commissions, Trading Capital will now
equal
$50,950. Trading Capital increases after profitable trades and
decreases after
unprofitable trades.
When a Profit Center contains 25 or more trades, the trader has access
to
extremely important statistical information which allows him to
intelligently manage
his trading activity and slowly, but surely, evolve into a more
confident, disciplined
and profitable trader.......increasing his skill levels not only in the
money
management discipline but also the psychological and trading
methodology
disciplines as well.
Our second hypothetical trader is a short term SP500 and Bond day
trader. He
uses one trading system on 30 minute bars and another trading system on
10
minute bars. In addition, he makes trades based on recommendations
taken from
a daily fax service named John Doe's SP500 DayTrader. He also has
noticed that
the SP500 market tends to go sideways and become very choppy during the
1130 AM to 130PM New York lunch break. He would like to know his
trading
performance during this time period to see if he is getting stopped out
too often
during the market's lunch hour sideways price movements.
He decides to create the following trading business organization:
GLOBAL
SP500
BONDS
SP50030
SP50010
BONDS30
BONDS10
SP1130130
JOHNDOEFAX
The Global Center monitors all his trades. The SP500 and BONDS Centers
monitor trades segregated by future. The SP50030 and SP50010 monitor
trades
based on the 30 minute and 10 minute bar trades for the SP500. The
BONDS30
and BONDS10 Centers monitor trades based on the 30 minute and 10 minute
bar trades for Bonds. The SP1130130 Centers monitors all SP500 day
trades
taken in the 1130AM to 130 PM New York lunch break time period.
Finally, the
JOHNDOEFAX Center monitors trades taken from the John Doe fax service.
On 7/11/98, the trader makes a $500 losing SP500 trade based on the 10
minute
bar trading system at 1230 PM New York time, trading one contract and
paying
$25 commission. The following trade information will be entered into
the
appropriate Profit Centers:
Date trade closed out
7/11/98
Name
SP500
$ profit or loss
( 500 ) Loss
# traded
1
Commissions
25
The trade will be entered into the GLOBAL, SP500, SP50010 and SP1130130
Profit Centers. The GLOBAL Center monitors all his trades. The SP500
Center
segregates his SP500 trades from his Bond trades. The SP50010 monitors
his
SP500 trades based on his 10 minute bar trading system and finally, the
SP1130130 monitors SP500 trades taken during the 1130 AM to 130 PM New
York lunch break.
If he capitalizes each Profit Center with $20,000 Initial Capital,
after the $500
losing trade and $25 commissions, he will then have $19475 in Trading
Capital in
each Center. After 25 trades are entered into a Profit Center, there is
sufficient
information for the trader to begin analyzing and managing his trading
business.
How to do this will be discussed in future articles.
Notice that there is no right or wrong way when developing a trading
business
organization. The organization you create will reflect your own
personalized
trading style and overall approach towards the marketplace. Creating
your own
personal trading business organization is the first step in becoming a
professional
and disciplined trader.
Some other types of Profit Centers for futures traders are:
CBOT
Trades segregated by exchange to monitor
slippage
PORT1
Trades segregated by portfolio ( portfolios can be
different types of futures, trading systems etc )
GRAINS
Trades segregated by complex ( Grains,
Currencies, Indexes etc )
AUG1998
Trades segregated by time period
SEASONAL
Seasonal trades
SPREAD
Spread trades
LONG
Long trades
SHORT
Short trades
PATTERN1
Trades segregated by price pattern if price
patterns are used to initiate a trade
A similar approach can be used for stock, options and fund traders.
Have you entered the highly competitive trading arena without a
business plan or
business type organization? Do you think you can succeed in the long
run without
such a plan or organization? Do you think a division manager at General
Motors,
U.S. Steel or Xerox can manage his division without a formal business
plan,
business organization and monthly statistics which reflect the
operating results of
the division under his supervision? I will let the reader of this
article answer those
questions for himself.
Once the trader has settled on his business plan and organization, he
is then ready
to trade.
These statistics will reveal the trader's 1) trading performance, 2)
risk
management, 3) profitability and 4) drawdown situation for each Profit
Center.
The trader will now be able to manage his trading operations on a
professional
level and make informed, educated and confident trading decisions.
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