Your Trading Mission, Your Trading Values

A lot of you know that, before my current job as a daytrader, I was climbing up the corporate ladder at an engineering firm. Like most big companies, we had plaques and cards with grandiose mission statements on them. Something like: “We will provide exceptional value to our customers via superior technical solutions created with a sense of ethics and integrity.” Even just typing it makes my eyes roll. The associated list of “corporate values” were just as sad (and they only ever talked about them just before ISO:9001 audits so we’d know what to say…. but that’s another story).

Only a room full of high-salary business people could produce a mission statement so worthless. Of course they meant well, but in the end they just didn’t know what they were doing. Unfortunately, when I talk to traders about what they want to achieve, I hear equally well-intentioned yet equally useless statements. My background in business helps me keep a straight face (figuratively, since the exchange is always over e-mail or instant messaging), but I’ve been meaning to write an article about this topic for quite a while.

Your trading business is just that: a business. Let’s think a little about how we can treat it like one.

Defining the Concepts of Mission and Values

What exactly is a mission and a value, in terms of a business endeavor? Let’s ask Jack Welch, former CEO of General Electric:

… a good mission statement and a good set of values are so real they smack you in the face with their concreteness. The mission announces exactly where you are going, and the values describe behaviors that will get you there.

That quote is from his 2005 book, Winning. I thought it was one of the better non-technical books on management that I’ve read.

Good mission statements are so difficult to write because they are both high-level and specific. Ok, so no more lip-service to a laundry list of virtues. Of course, instead of “ethics” and “integrity,” traders usually cite “consistently profitable” and “only taking the best setups.” Yawn. Wake me up when they get past the part about not pulling stops… Obviously you need those, but what are you really going to do to succeed in your trading business? As Jack says (ibid.):

In my experience, an effective mission statement basically answers one question: How do we intend to win in this business?

From 1981 to 1995, GE’s mission was to be the most competitive enterprise in the world by fixing, selling, or closing every business unit that could not achieve No. 1 or No. 2 status in its market. For another example, here’s Google’s mission statement: Google’s mission is to organize the world’s information and make it universally accessible and useful.

The “values” are just behaviors that flesh out the mission statement, and I’ll give some examples below.

My Trading Mission Statement

A few months into my trading career, I gave some thought to what I really wanted to achieve, and came up with a mission statement. I’m not saying this is the best mission statement, or the most original, but it’s what I came up with:

I will generate the smoothest equity curve possible, using the smallest bets that still cover my living expenses.

When I say “smooth,” I mean no big losses and no big wins either. Having recently read Fooled by Randomness, and experiencing the ups and downs of novice trading, I had a few specific ideas floating in my head:

• You can’t tell the difference between luck and skill in the short run, and I am still in the learning stage of the game.
• People like the concept of expectancy, because it tells them it’s ok to only win 40% of the time… but I’d rather minimize my risk of ruin as long as I’m making enough to get by
• Living month-to-month, I don’t want to wait an unspecified time for a windfall gain… I want a stream of steady small wins
• Given a liquid enough instrument, leverage is a knob you can turn any time you want to “magnify” your wins and your losses.
• Returns with shallow drawdowns can be safely magnified the most. So, once I have some mastery of trading, I should be able to easily shift my focus towards becoming a seriously wealthly mofo

You can see my thinking in-progress in my posts from that era, which focused on pitfalls of focusing on expectancy and relative danger of trading different account sizes, and the like.

The secret to success seemed to boil down to generating the smoothest equity curve possible. I think, as a mission statement, it does at least answer the basic question how do I intend to win this daytrading game? The vague long-term goal was to enjoy steady small returns (not depending on big wins and not suffering big losses), and then start increasing leverage after a sufficent track record had been established. I’m still using that plan, today.

The associated values that flesh out this mission statement include things like:

• Increase profits by making more trades rather than bigger trades (this also improves consistency, see my article on the topic)
• Do not specialize in any one trading system (see articles about the ideal discretionary “Type 3″ trader, and numerous others about various approaches I’ve incorporated into my trading)
• Focus on win rate, then profit factor, then expectancy, in that order
• Minimize per-trade risk (every time my trading reaches a new level of profitability, I decrease my normal position size. I used to be able to live on 5R of profits a month… now I need more like 20R per month to live). This usually implies ‘minimize leverage’ as well

Hopefully it’s obvious how these values are in alignment with my overall mission. They are the “hows” that compliment the mission’s “what.” Once again, you can probably figure out other values by reading through the articles I wrote last year.

Use Your Mission Statement

The great thing about an effective mission statement and associated values, is that you can actually use them. Every time I make a decision, I can think back to my mission, and make sure I am in alignment with it. Here are just a few examples:

• At least once a month someone asks me if I daytrade futures or currencies. It certainly sounds exciting, but it doesn’t fit with my current mission at all.
• Every so often people leave a comment on the blog saying I’m making a mistake by not “swinging for the fences” with my profit targets. It can get frustrating, but I try to explain that I have different goals than they do. Plus, they rarely seem to grasp how you make the same money winning $.10 on 2000 shares as you do winning $1.00 on 200 shares.
• It’s taking me a long time to get into the options game for longer-term trades (which I had planned to do by now), because the increased leverage and wide spreads are at odds with my current mission. I am still investigating strategies, and hoping that penny option pricing helps me out to some degree.
• I have some interest right now in doing a better job of choosing profit targets for my scalps, so I don’t leave so much money on the table. But, that is taking a back-seat to things like learning how the fibonacci traders trade, since adding more trading styles is in-line with one of my core values.

The list goes on and on..

Having an overall idea of where you are going as a trader clarifies and shapes your goals for each month. It keeps you focused on what’s really important. If you are mired in a bunch of vague near-term goals like “make $x by y” or “obey my own rules,” then you might benefit from creating a framework for all those tasks in the form of a mission statement for your trading business. It need not be anything like mine, especially if you have different goals for your trading career, or a different personality, or whatever. Hopefully, I’ve made the concept seem less hokey than most businesses make it.