Quote from NoDoji:
If you trade for a living, then trading is your business and you should be thinking in money terms, but you need to place trading into a business framework.
You are your own boss, so you need a business plan to answer to, since you donât have a supervisor to answer to.
Your business plan should include:
A description of your statistical edge based on in depth market research and testing, and a description of all valid trade setups that you will trade so you can take advantage of the statistical edge.
How much weekly/monthly profit you need to generate to pay expenses and have something left over for savings/emergencies.
Based on your statistical edge, the average position size needed to generate this profit, while limiting risk of ruin.
Rules for trade management to take full advantage of your edge and rules for risk management that, combined with your average win rate, provide a positive money management edge (for example: trend-following strategies - 50% win rate, 2:1 reward:risk ratio; reversion to mean strategies - 90% win rate, 1:4 reward:risk ratio).
Once youâve done your research, and put together your business plan, you should feel confident that you will be profitable as long as you follow your plan. Thinking about profit/loss trade by trade will be detrimental and probably drive you to drink. Youâll start picking and choosing trades instead of trading all valid setups per your plan, youâll take profits too soon and mess up your R:R ratio; you may start to stray from your plan altogether.
A good business that provides products or services to customers will be most profitable when it provides what customers want at a reasonable price and treats all potential customers with respect. If the business treats certain prospects with indifference because the customer "appears" unqualified, it could lose large profitable sales.
Similarly, a good trading entrepreneur will provide his/her trading account with every valid opportunity to turn a profit. A setup may appear unqualified (âthis thingâs been running up all day, it canât possibly go higher so Iâm not going to trade this pending breakoutâ), yet turn out to be the most profitable opportunity of the day (in fact, this happened to me just today).
Losing trades are simply a cost of doing business and are meaningless within the bigger picture of your trading plan having demonstrated a statistical edge of profitability over time.
If youâve done your research, developed a business plan, and tested the business plan, then youâll think of losing trades much like a business thinks of paying its vendors for inventory; no one likes to pay bills, but you work to get the best price while maintaining quality, meaning you limit losses (costs) and during times when your customers (the market) are bidding/offering for what you have with irrational exuberance, you take as much additional profit as possible.
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. Just teasing 