Lesson 14, how to run your trading business like a hedge fund. Welcome to Lesson 14. My name is Sam ADA. I'm a global macro Currency Trader and the owner of FX renewed calm. This is the advanced forex course for smart traders. It's a quote that said, longevity is the key to success.
If you don't have effective business systems in place to support your trading, you'll find it more difficult to do so amount of wealth from the market. You might get a few pips here and there, but without a proper infrastructure in place, you hit a roadblock. When you get to a certain level. Or worse, you'll suffer a large loss on the profits you've taken so long to accumulate. It pays to be prepared before happens. In this lesson we go into the systems you will need to have in place to trade forex with confidence and at size.
These include risk management, trade assessment and execution, recording and monitoring your performance trading strategy evaluation, contingency planning. By adding these elements to your trading plan, you're entering the realm of the professional. These are the tools that hedge funds used to run the trading business. And they this lesson has been put together with the help of a friend of mine who runs one such major fund. trading is a business not a hobby for the trader that is serious about making money trading is not an interesting hobby filled with chat gazing and reading news. It is a business.
This means lots of hard work implementing the trading business systems they need for success. Just like if you were starting a business in any Other industry, they system should be written in a business plan. It doesn't have to be a stuffy plan. It should be one that is a pleasure to work with, but make sure you write it down. Mark it was it Paul Tudor Jones said risk control is the most important thing in trading. Your first job as a trader is to manage risk.
The first systems you need to build into your trading plan risk management systems. It is through the systems that you protect your trading account from damaging losses resulting from poor trading the fault with your trading system, fault felt with your position sizing model or a run of losses due to market conditions. Your position sizing strategy is also an important part of your risk management. position sizing is how much to place on each trade aspect of trading. Here we discuss account wide rows that are to be implemented along With your position sizing model, maximum loss in a day, week or month. If you experience a loss on your account that reaches a certain level, you will need to take action to limit further losses.
This could be to stop trading altogether, or it could be to reduce your position sizing. Depending on your trading style. This could be a maximum loss in a day, week or month. For example, Mike Platt allows traders in his fund a maximum loss of 3% per year. If they lose 3% in their habit allocation can have if they lose a few of the 3% of the reduced allocation, then they are out of a job. maximum number of trades at any one time.
The more possessions you have at any one time, the more difficult they become to manage. If your positions are correlated, you can essentially end up with one big possession in the state of several smaller ones. You will want to To decide how many trades you have on any one time and how many correlated positions you allow yourself to take maximum leverage on the account. Even if you have very few trades if you're scaling in, you can end up exposed to a very large position. What am I protecting yourself from this risk is to limit the maximum amount of leverage you have on the account. For example, you could set a maximum leverage of 10 to one.
The maximum leverage could either be set physically on your account by your broker, or you need to calculate it yourself as you place trades. Assessing trades when you find an opportunity to place a trade, you want to have a system for assessing if it is the right trade for you. This is not meant to be a time consuming investigation, but rather a quick check to see whether the trade fits you like a hedge fund manager would do with their trading team. hedge fund that positions and trades that combined to express an overall picture of the funds view. And they are carefully considered regarding weightings and what synthetic cross positions are created by introducing another position. While you don't have to go this far and can treat trades as individual non correlated trade ideas, you generally want to consider the following factors.
Risk reward check if the trade is a risk reward ratio that you desire. timeframe check if the trade matches your trading horizon. correlations check your current position for correlations. If the new trade is correlated with your current position you may not want to take it hedging and synthetic positions. If you have current trades in a trade could act as a hedged to your compositions or effectively create a synthetic position that you did not intend to have. For example, if you are long USD JPY and take a short euro JPY position Then in effect, you have a short Euro USD position.
Position sizing. When you get to place a trade you need to decide what position sizing model you will use on the trade. For example, you may use different position sizing rules for short and long term trades. Separately separate accounts for separate strategies. One of the keys to successful trading is simplicity. Using different trading strategies in one account can be a major source of trading mistakes.
If possible, set up a separate account for each strategy. use multiple brokers it is preferable that you use different brokers for each account rather than having several accounts with the same broker. This will protect you from counterparty risk by your broker going bust. Recording and monitoring trades. When asked if they record the trades, the majority of amateur traders say no When a professional is asked if they record the trades, the answer is invariably Yes. If you don't record your trades, it's hard to know what you're doing right or wrong, so it's hard to make meaningful changes to your trading strategy.
Ray Dalio said. We test our criteria to make sure they are timeless and universal. Trading Strategy evaluation, trading strategy evaluation is a critical facet of managing your trading like a business. Not only does it help you improve, but a guide your position sizing. The better the trading system you have, the more you can risk on each trade. When you are evaluating your trading system, you want to check that you have clear objectives and a matching position sizing algorithm.
You want to check that the strategy meets the objectives of the trading plan. You want to be able to understand each part of the strategy why it works. It's ages and under what conditions that works and does not work. You want to understand what the underlying beliefs of the strategy are. Understand how the strategy performs in the primary market types. It's good to know van tops is queuing system quality number for each market type.
Make sure the strategy includes roles that guide behavior, including how much discretion to use. market was it Michael Platt said the strategy is always changing. It's a research wall. Avoiding system diff, forex trading strategy stop working ages disappear and market conditions change. But disaster can be avoided. Don't need to experience system diff if you know how to tell if her system has stopped Working before you lose money why trading strategy stopped working.
The number one reason strategy stopped working is out optimized to work in a particular market type. When the market type changes the system stops working. Other reasons forex trading strategies stop working include the strategy is poorly designed, the age disappears, trading mistakes, or position sizing errors. plan for your strategy to stop working. To do this, you can trade multiple systems, you can make sure your position sizing rules cater for the worst case scenario. And make sure you don't become emotionally tied to your strategy.
But most importantly, you want to have a benchmark of your strategies performance. Once you see a deviation from this benchmark, you can go into high alert mode and monitor your strategy closely to see if its performance recovers. Or you can simply stop trading the strategy altogether and methodical approach to managing system death. Avoiding system death is simpler than you may think that can be a bit of work. What you need to do is track your strategies performance to create a benchmark, and then notice when the strategy performs outside expectations. Note that you don't need to wait until you are losing money to stop trading the strategy.
Instead, you can simply reduce your trade size as performance degrades. Check the written version of this listen for a specific method for doing this. market was a tom basso said my mental rehearsal for a catastrophic event is the picture a doctor in a triage situation. He is in a battlefield emergency operation Writing room, income 50 bodies, some are going to live, some are going to die. The doctor has been trained to handle the situation. He's going to make all the necessary decisions.
He is calm and collected, not nervous. contingency planning. When you're trading small sizes, contingency planning is not so important. But the more you develop your trading in the larger sizes you trade the more relevant it becomes. There are many horror stories of traders who have had an unexpected event interrupt their trading and wipe out a year's worth of profits. Even if it's not that dramatic, unexpected events can cause a large loss in the blink of an eye.
The contingency planning of major hedge funds is indeed as a strategic planning in a modern military organization. That is extremely thorough. market was it Tom basso plans how to run his entire farm have a laptop and mobile phone for example, even conduct drones Run three tests out of systems in the case of a disaster affecting his business. Here's a list of contingencies you will need to plan for if you want to trade at a reasonable size. Again, check the written version of this lesson for more detail. Things you want to plan for things that impact you personally as a trader, things that affect your environment events related to your broker problems or disasters with equipment, market disasters and environmental disasters.
Get serious and start planning. Take a look at your conduct in the market and decide if you're treating trading like a business or a hobby. If you're not giving trading the gravitas that it deserves, and stop and assess what you need to change. Start by writing down your risk management roles and sticking to them. As time goes on, revisit this list And start working on your monitoring and recording systems. Before moving on to contingency planning.
If you do these things you are creating the systems that will form the lifeblood of your trading. And you will be able to support the growth of your trading account to a large size without any big hiccups along the way. In the coursework for this lesson, you can start writing your trading business plan. I'll see you in the next lesson.