The Business of Trading: How to Run Your Trading Like a Hedge Fund with Van Tharp's Principles

For many, trading is a hobby, a speculative pastime pursued in the hopes of making a quick buck. They dabble in the markets, chasing hot tips and jumping from one strategy to the next, with little thought given to the long-term sustainability of their approach. Dr. Van K. Tharp, a visionary in the field of trading education, argued that this amateurish approach is a surefire recipe for failure. He championed a more professional and business-like approach to trading, one that is based on the principles of strategic planning, meticulous record-keeping, and rigorous performance analysis. By treating your trading as a serious business, Tharp argued, you can transform it from a speculative gamble into a consistent and reliable source of income.

Tharp's philosophy is rooted in the idea that a trading business, like any other business, requires a clear and well-defined plan. This plan, which he referred to as a "trading business plan," is a comprehensive document that outlines every aspect of your trading operation, from your mission and objectives to your risk management strategy and your plan for continuous improvement. The process of creating a trading business plan forces you to think deeply about your trading, to clarify your goals, and to develop a systematic and disciplined approach to the markets.

The Components of a Trading Business Plan

A comprehensive trading business plan, as outlined by Van Tharp, should include the following key components:

1. Mission Statement: Your mission statement is a concise and inspiring declaration of your purpose as a trader. It should answer the question, "Why am I in the business of trading?" A clear and compelling mission statement can provide you with the motivation and the focus to persevere through the inevitable challenges of the market.
2. Objectives: Your objectives are the specific and measurable goals that you want to achieve with your trading. These could include financial goals, such as a certain level of profitability or a specific rate of return, as well as personal goals, such as achieving financial independence or developing a greater sense of self-mastery.
3. Trading Systems: Your trading business plan should include a detailed description of the trading systems that you will use to achieve your objectives. This should include the setup conditions, the entry and exit rules, and the position sizing algorithm for each system.
4. Risk Management: Your risk management strategy is the cornerstone of your trading business plan. It should outline your rules for position sizing, your stop-loss policy, and your plan for managing drawdowns. A robust risk management strategy is essential for preserving your capital and ensuring the long-term viability of your trading business.
5. Record-Keeping: Meticulous record-keeping is a hallmark of a professional trader. Your trading business plan should outline your system for recording your trades, your thoughts and emotions, and your overall performance. This data is essential for conducting a periodic review of your trading and for identifying areas for improvement.
6. Performance Review: Your trading business plan should include a schedule for conducting a periodic review of your trading performance. This review should be a comprehensive and objective assessment of your results, your adherence to your trading plan, and your progress towards your objectives.
7. Contingency Planning: Your trading business plan should also include a contingency plan for dealing with unexpected events, such as a major market crash, a prolonged losing streak, or a personal crisis. A well-thought-out contingency plan can help you to navigate these challenges with a sense of calm and confidence.

The CEO of You, Inc.

The process of creating and implementing a trading business plan is a significant one. It forces you to take on the role of the CEO of your own trading business, to take complete ownership of your results, and to approach the markets with a level of professionalism and discipline that is far removed from the amateurish mindset of the average trader.

By running your trading like a business, you are no longer at the mercy of the market's whims. You are a strategic and disciplined operator, systematically executing a plan with a positive expectancy. You are a risk manager, a performance analyst, and a lifelong learner, constantly striving to improve your skills and to grow your business.

In conclusion, Van Tharp's principles of business planning provide a effective framework for professionalizing your trading. By treating your trading as a serious business, you can cultivate the mindset, the habits, and the systems that are required for long-term success in the financial markets. You can transform your trading from a source of stress and uncertainty into a source of pride, purpose, and financial freedom.