Monday, March 24, 2014

Facing the Execution Gap: Running Your Trading Business

It is common for portfolio managers and traders to refer to their work as their business.  And, after all, why manage money if we're not in the business of achieving superior risk-adjusted returns?

It's interesting, therefore, that market participants don't make greater use of organizational psychology in maximizing their businesses.

It is easy for a trader to imagine that psychological issues are interfering with best trading practices.  Less commonly acknowledged is that one's trading is not well organized as a business.

What the graphic refers to as "execution gap"--the difference between what you intend to do and what you actually accomplish--is often a function of disorganization.  This is not necessarily the result of personality problems and emotional upheaval.  Rather, it is the understandable consequence of trying to keep one's eye on markets and opportunities and at the same time on one's trading business.

What if what you needed to best improve your trading was an improvement in the running of your trading business?

Here's a little exercise:

Think of yourself as a business organization.  There is you the trader, but there are also a number of others within your organization who you manage.  Those include the people you talk with about markets, the sources of information that you access, and even the people in your personal life who impact your energy and focus.  Every person and every resource that can influence your trading performance is part of your organization, your trading business.

Now, with that organizational mindset firmly implanted, read the article on 4 Disciplines of Business Execution.  In that article, Sean Covey summarizes ideas from his book of that name and explains four ways in which successful organizations narrow their execution gaps.  Ask yourself how you would score if you were to grade yourself on each of these disciplines.

As Covey notes:  "...if you want to achieve goals you've never achieved before, you have to do things you've never done before."

If you're looking inside yourself for your answers, you may be neglecting the running of your business.  It's great to work on discipline and trading your plans, but your plans are apt to be suboptimal if you're not properly harnessing and managing the resources of your business.

Imagine a restaurant owner who is so busy cooking meals and serving customers that he never adapts his menus  to changing customer tastes.  He is hard working and disciplined--and he goes out of business.  

Great money managers aren't necessarily great business managers--and yet it takes both to sustain a successful trading career.  Researching and trading markets is half the battle: the other half is charting our business direction and executing on that strategy.

Further Reading:  Questions for Your Trading Business


Curtis said...

The problem for the non full-time profesional trader in treating trading as a business is the biggest advantage that a business has is priority over other things -- and that's not something that one can replicate unless it is their primary income.

At any rate, I created a checklist that is designed to measure how professional one treats their trading. Add +1 for yes. Higher scores are better.

1. Has an empowering belief system (nothing starts from nothing).
2. Earliest experiences with trading are positive, consistent winning experience. Didn't start a loser.
3. Has experienced some challenge, significant DD, trading loss, etc.
4. Creates own narratives that explain technical phenomena (as opposed to using common narratives).
5. Builds own indicators or deconstructs existing indicators. Rarely or never uses any non proprietary indicators.
6. Has achieved success using a process based trading style (non rule based, discretionary)
7. Has achieved success using self-developed trading systems (rule based)
8. Has more then one profitable trading system operational.
9. Does not go it alone. Has at least one trading partner (individiual must be genuinely passionate about trading) who is trust worthy and can share systems and strategies with.
10. Has capital resources beyond oneself, i.e through partnerships, investors, or other firms.
11. Innovates beyond the standard paradigms that system and discretionary traders promote, i.e creating graybox or mixed mode systems.
12. Able to deconstruct and see the implicit assumptions that underlie quantitative trading methods.
13. Has a dedicated virtual machine for trading activities.
14. Has identified primary strengths and possible weaknesses of methods and keeps them up-to-date.
15. Has systems/trades running across a variety of holding periods and markets.
16. Has successfully automated at least 1 strategy.
17. Has trained and mentored at least one other trader
18. Is willing and able to trade smaller then account size allows when performance dictates.
19. Does not use common rules regarding risk such as "2% rule" but rather evaluates both the probability of loss and size of loss in accordance to trading game plan.
20. Keeps a record of high value research and development. Does work on the highest value tasks every day.

Curtis said...

Something to think about, what type of policies are actually going to be conducive or most encouraging for small business development? Well, once you factor in that most businesses fail then it becomes obvious socialist policies that provide a security net are going to be most "small business encouraging". And what type of policies are going to discourage small business development? More of the policies associated with "capitalist" policies, i.e lack of safety net, will encourage people to work for companies, go to school, or seek other forms of institutionalization.