Do you know why so many newly formed small businesses fail? Would you believe that one of the most common reasons is the fact that the owners of the fledgling company didn’t develop a business plan?
That sounds crazy, but it’s true!
Your investment enterprise should be treated as a business. Not as a kind of gambling, and not as a hobby, but as a business. As such, you need a plan, just like every other fledgling business needs a plan, and yet, only a tiny percentage of novice investors bother to develop one, preferring to “trade from their gut.” As you might imagine, that never ends well. In fact, you may have tried that approach yourself before finding your way here.
If so, we apologize, because it almost certainly cost you time and money, but the fact that you’re here now says good things about you, and about your long-term chances of success.
Here’s the good news about investment plans and strategies: It’s not hard to come up with a profitable strategy. Almost no investor who creates a strategy fails because the strategy itself was a loser. No, instead, they tend to fail because after making their plan, they didn’t follow it, and the reason most people don’t follow their own plans comes back to the psychology of trading. They allow their fear, greed, and/or ego to get in their way.
This is a crucial observation because one of the things we can learn from it is the fact that if you want to actually follow your plan, then you’ve got to take your own personal psychology into account.
That, as much as anything else, explains why you can’t just wholesale copy and paste someone else’s trading strategy into your own life. People who do that seldom follow the plans they copy because those plans (quite naturally and obviously) don’t take their own psychology into account.
Again, we’ll get back to the topic of psychology later on in this course. For now, let’s focus on metrics.
Metrics are the way you judge the success (or failure) of your plan. How good is it? How much money is it making you?
Only by answering these questions can you tweak, revise and improve your plan. Here are some of the essential numbers you’ll need to capture if you want to adequately measure the success of your plan, once you devise it:
• Gross Profit
• Total Net Profit
• Total Number of Trades Made
• Number of Profitable Trades
• Number of Losing Trades
• Average Winning and Losing Trade
• Ratio of Average Win/Loss
• Maximum Number of Consecutive Winning Trades
• Maximum Number of Consecutive Losing Trades
• Total Return On Your Account
These are powerful statistics. Armed with them, you’ll be able to tell at a glance how well your strategy is performing and where/how it needs to be improved.