Trading as a Business - Your Most Important Role

You. Hi, Brian McAvoy here with Inside Out Trading. And I'd like to talk to you for just a couple minutes about one of your most important roles, probably the most important role as an individual trader, as you know, I mean, this is your business and you're the cheap cook and bottle washer. You got to do everything. You're the one running the business. You got to manage it. Doing the trading, doing the books, the accounting, housekeeping, everything, everything is your responsibility. Now, there's one role, and I've hardly ever heard it brought up anywhere. And whether you look at trading as a business formally or not, this really is probably one of your most important roles. I mean, if you're really wanting to make money with trading and enjoy consistent, reliable profits, this is your most important role now. Okay, so what am I talking about? Well, at the heart of your trading is your system. And before you can ever even start trading, hopefully you selected a system to work with, a system or methodology. Now, the thing is, before you go risking money with it, you need to know if it actually has a probability of making you money. The last thing that anybody really wants to do is just. Just go blindly into trading and learn everything through trial and error. I think I'll try this and see if it works. I think I'll try that and see if it works. Now, I don't mean to offend you or insult you, because I've been there, too. When I first started trading, I didn't know squaw and I had to make a lot of the same mistakes I'm sure you've made. Now, the thing is, you can't systemize your trading. Hopefully you have. You've got a system or, like I said, methodology that you use. The thing is, you have to know how good it is. And once you have something set and you get something that's working, you'll want to make it better. Now, you don't want to just go making random changes as well. So you also need to be able to analyze your system and its performance. Not just did it make money, but the ins and outs of it. What the potential profit really is, what the weaknesses are, what the potential risks are. I mean, drawdown is always a risk. You might have a system that's working great now. It's protecting you from losses. It's doing everything that it's supposed to do. You decide to go and try a change, and on the surface it appears to make more money. But you didn't know that that change also has maybe, perhaps doubles your potential drawdown well, you want to be able to find all that out before you risk real money with it. So how do you do that? Well, you back test the system first and then you analyze the metrics. You don't just look to see if it made money because see that's really an inherent danger with trading as people are only looking at the bottom line. You don't want to look only at the bottom line. You need to know other things about it. You know, you need to know what the average profit is, what the maximum potential drawdown is, what its maximum potential profit is, what the real winning percentage is, and the real profit to loss ratio. You need to know these things in hard numbers. I mean this is business. You don't want to go on opinions or guesswork or punches. It's your money and you want to know that what you're, what you're going to, you know, try in the markets that you have some sound reasoning and supporting evidence that it's going to work. So how do you do that? Well, you do your back testing and then you can use a tool like the Trading Performance Analyzer. It was designed specifically for this and it's simple. I made it specifically simple. The whole reason I created it is because I had several clients of mine saying, Brian, I know I need to do my backtesting, I want to do it, but the stuff that I found out there is so God awful expensive, it's so hard to use. Or if a couple of them that I've looked at, you know, I finally did get them, you know, get them working on my machine and I opened them up and they were so overwhelming that I really, I couldn't use them because it just would wear me out to try to use it. So I made this specifically simple. I developed it with a bunch of individual traders getting their feedback, making sure it's all nice and clean and meaningful and useful. I'm an engineer and it's always just been my nature that numbers should be meaningful, information should be meaningful and useful. Numbers by themselves are useless if they don't have meaning. That's what the analyzer all is about. It lets you take a look at a system and have meaning to it in depth. Meaning in depth, insight into it. As far as the system, does it work? How well does it work? What are the inherent strengths and weaknesses of it with potential risks and downsides. And it makes it simple, makes it easy. You don't have to be a programmer, you don't even have to be an expert with Excel. I mean if you can just open up a spreadsheet and plug in a few numbers, you can get all this information out of it. And it's only good business to do this. You don't want to risk any money in the markets unless you have some supporting evidence that says what you're wanting to try works. So, again, back to where we started. That's the role of the system analyst. You need to be able to take a system, analyze it, and have some evidence and proof with real market data that, yes, this makes sense and has a likely shot at really working. Of course, there are no guarantees, because when you're back testing well, you can always forward test, which is a great way to do it. But then once you're done with the forward testing and they go live, yes, the markets can change. But at least you have some supporting evidence that, yes, this did work.