Trading as a Business Introduction II

April 25, 2006

So we start with the question, “How can we understand the markets?” If we
understand how they work, we can get a better understanding of ourselves, and in
turn be better traders.
Controlling greed takes discipline. As far as fear, Peter Steidlmayer2 explained in
his work with Market Profile that markets exist for one purpose and one purpose
only—they exist to facilitate trade. Facilitating trade means that the markets will
do anything they can to get individuals to participate in the market. How they do
this is through movement. Markets move up and down searching for buyers and
sellers.
The crucial point here is that markets must move for their survival. Understanding
this literally changed the way I thought about the markets. Think about it. Markets
have to move! This concept is major for anyone who has had to sit through a
trend-following strategy trading in a sideways market. The knowledge that the
market has to move eventually changes the way you look at trading. It gives you
confidence that the string of losses can’t continue indefinitely. It eliminates the
fear!
You see, Steidlmayer explained that if a market does not facilitate trade, it will die.
If it does not continue to bring traders in, to lure the buyers and sellers, the
market will cease to exist. And the prime directive of a market is survival. To keep
traders interested, the market has to move. It cannot remain in a small trading
range or traders will lose money, become disinterested and leave. Eventually there
will be less and less liquidity, traders will stop trading, and the market will die.
Knowing that a market must facilitate trade and move, or else die, has given me
great confidence in trading. When I am forced to trade through quiet markets, I
remember this principle. This principle has reduced my fear and increased my
confidence immeasurably.
STRATEGY TRADING: MAKING GOOD BUSINESS SENSE
For me, strategy trading is the only answer to the problem of fear and greed, and it
is the only logical way to take advantage of the concept of Market Facilitation.
First, trading a strategy provides the discipline necessary to begin overcoming fear
and greed. Trading a strategy that has been back tested on historical, quantifiable
data is a major way to inject discipline into your trading and to begin to control
your fear and greed. If we think of a trading strategy as a small business, we can
design our business to make money based on historical simulations. Then, our job
becomes the implementation of the strategy rather than the interpretation of the market. If the strategy loses money and busts, we change the strategy. It’s a matter
of good business sense.
Second, if we know that a market must facilitate trade to stay alive, we can devise
strategies that guarantee that we will always be in for that inevitable big move. If
we know that the big move will eventually come, and devise the strategy
accordingly, our task becomes to minimize the drawdown (investment) while we
wait. I have never been able to predict when the market was going to facilitate
trade and get in for the big move. Instead, I have devised strategies to ensure that
I will be in for the big ride and my losses will be minimized while I wait. It’s just a
matter of good business sense.
As a businessman, I have concluded that the only rational way to trade the
markets is to trade a strategy. All of the hocus-pocus about predicting when this
market will move, and how far, is just that—hocus-pocus. The people that make
the big money are the ones who don’t try to predict tops and bottoms but who
consistently take a little out of the middle. The only logical way to do this
consistently is through a well thought-out, well-designed strategy. It’s a matter of
good business sense.
THE ADVANTAGE OF TECHNOLOGY
Anyone serious about finding a profitable strategy should use the latest technology
and the best software available. This means learning how to use a computer.
When I started trading, all historical testing had to be done by hand. This was
labor intensive and very time consuming. It was necessary to peruse charts visually
and record the simulated entries and exits by hand.
For intra-day charts, this process was even more time consuming—the charts had
to be printed with the indicators on them and for a significant length of time
(several months). If these indicators didn’t prove to be profitable, the process had
to be repeated for the next month with revised indicators. This process continued
month after month. It would sometimes take me three to six months to find a
strategy that would work under current market conditions.
System Writer, followed of course by TradeStation, was the first computer
program to help eliminate this labor intensive historical testing. Using
TradeStation to do your testing has three distinct benefits.
The first is the amount of time saved. With TradeStation on a fast PC, it’s possible
to test in 5 to 30 minutes strategies that literally used to take hours or days to test
by hand. If you place any value on your time, this cost savings alone is impressive.
Second, you can avoid mental mistakes. I have, in both myself and in talking to
other researchers, found a propensity for making mistakes when performing
manual historical testing. On many occasions I have found myself changing the
strategy midstream. I have sometimes made the assumption that of course I
wouldn’t have taken that particular trade, when the reality is I probably would
have, or of course I would have moved my stop up, when in reality I probably
wouldn’t have, and so on.
I can recall many situations where, when testing manually, I got different results
on different days with the same data and the same strategy. I was either in a
different frame of mind or in a different emotional state and actually made
different decisions on the same data!
A computer, however, cannot trade a strategy differently tomorrow using the
same parameters and data as it is using today. Its logic is consistent and can’t play
tricks on it. For historical testing, you can avoid this very real problem by using a
computer.
Third, you can be more creative. Rather than spend all of your time doing the
testing, you can have the computer do the testing and you can spend your time
researching new trading ideas.
Strategy development is like any other business. It’s very unusual to find a
successful business where only one individual has designed the product, does the
marketing, is engaged in product development, and runs the machine to produce,
package, and ship the product.
It is much easier and less stressful to hire a staff to handle the paperwork and
production employees to make the product. The entrepreneur can then spend his
or her valuable time in product development and planning the future of the
company rather than running day-to-day operations.
In the trading business, TradeStation can be your staff and production employees.
The program is indispensable in time savings, cost savings and individual
productivity. It frees you from the repetitious side of the business so you can
spend your time on the creative side—the side that will ultimately make you the
money.
As the futures and securities industry continues to grow, more and more traders
will enter this business. The competition for profits will continue to increase. For

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