Doug Dew talks about the importance and benefits of sharing your trading plan with your partner. Doug has been trading on his own account for a number of years. He has a special interest in trading psychology and holds a Master’s degree in Mindful Leadership.
Let’s imagine that you know absolutely nothing about trading. You have seen the charts on CNN and heard the commentators talking in a weird language which is gobbledegook to you. You have heard about booms and busts and the Wall Street crash with people throwing themselves out of windows, but that’s about it.
One day your partner tells you they are taking up share trading. Your alarm bells go off immediately. Are we going to lose our superannuation or the house?
Your partner disappears into the study and spends increasing amounts of time staring at the screen. Every so often, they emerge, to tell you that they just made 6R profit on JHA. This is encouraging, but you have a nagging feeling that you are only hearing about the wins and not the losses, and anyway, who or what is “6R” or “JHA”?
You can’t help thinking that if everything is going so well, how come there is no Audi R8 Spyder sitting on the driveway and you are still taking your holidays at Merimbula?
These are the thoughts and fears your partner might be having about your trading obsession!
I hope this warns you about the perils of not being open and honest with your partner about your trading, and the anxiety it might create.
I want to show you that a full and frank discussion with your partner is a better strategy.
I have just been through this discussion myself, although in my case, I had been trading with success for a few years and my partner is very familiar with the stock market and holds shares herself. I had a Eureka moment one day and realised I had never told her what I was actually doing. I felt that it was wrong to use our money without her knowing what was going on. I will describe her reactions later.
The process starts with your trading plan. You do have a written trading plan, don’t you? If not, you are not only kidding your partner, but yourself as well. I use Louise Bedford and Chris Tate’s trading plan template. (You can get it for free from www.tradinggame.com.au)
The discussion should begin, not with:
“By the way, I am going to start share trading”,
“Darling, I am considering share trading, but before I start, I want to discuss with you what this entails, so we can make a decision together.”
You need to prepare carefully for this discussion, and think about what their concerns might be, so you will be ready to hear and address them. Don’t forget this is the one person in the world who knows when you’re talking bull dust, before you do!
So, what sort of questions might your partner ask? Here are some examples:
Why do you want to do this?
You need to think about what your objectives are, and try to make them measurable so you can both measure progress towards them, e.g.,
- I want to generate income to meet our school fees as the kids get older, say $X per annum.
- I want to generate money to add to our superfund, say $Y over ten years.
- When we retire, I want to fund our overseas trips, say $Z per year.
- I want the intellectual challenge of learning how to trade and then putting my knowledge into action.
- I hope to build up a circle of fellow traders and enjoy the interaction with them.
What makes you think you are capable of doing this?
This is a hard one.
You can talk about the generally held view that successful trading is 90% psychological, and what psychological strengths are required, (there is plenty of information available on this).
You can give an honest appraisal of your own strengths and weaknesses. Your partner will give you valuable input on this.
You can describe how you will use training resources and/or your past experience.
You can describe how your trading plan fits your personality.
If we do make money, won’t we have to pay tax?
This is a high-class problem. You will need to talk to your accountant about how to structure this. You also need to discuss what will happen if you become sick or pass away and how to get access to your trading account.
How much time will you allocate to this?
You have to come to an agreement about this. If you are spending twelve hours a day, trading every pip, this might not be good for your relationship. You might have to choose weekly trading instead… much more civilised. You will also need to factor in the time you will spend on training and interactions with other traders. What will happen to your trading when you are on holiday? If you are trading overseas markets, you may be up late at night.
How much of our money are you going to risk?
This the ‘bottom line’; whatever else your partner is interested in, this will be of absolute importance. You will need to spend time explaining all elements of your capital management scheme, (you do have one, don’t you?) e.g.:
- Your number one objective is to preserve capital.
- The capital you want available for trading is $xK (subject to negotiation).
- At no time will more than 6% of this capital be at risk.
- You will never have more than 1% risk on any position.
- All your positions will be protected by guaranteed stops, (need to explain what these are).
- If we ever get to the point where we have drawn down more than 25% of our capital, we will stop trading until we are both happy to recommence.
What markets are you going to trade?
Your trading plan will set this out, e.g. ASX 200 or Timbuctoo Coconut Futures, or both. You will need to explain what a ‘market’ is, in this context. What time of the day or night will you be trading?
What will you do every day/week/month?
This is a chance to demonstrate what you are actually doing when you are locked away in the study, e.g.:
- Running explorations
- Setting stops
- Keeping records
I would advise showing these processes on the computer, rather than just talking about it.
When will we take profits and losses?
Explain this carefully. It can be the most counter-intuitive part of your plan. You need to explain your plan for holding and selling positions, e.g.:
- Sell only when trailing stop is hit.
- Pyramid after break-even is hit.
- Do not take profits in any other way.
- Always sell if the stop is hit… no hanging on to losing positions.
When do we see some cash?
Another high-class problem. Do you want to see the Audi on the drive way or be trading with more capital? You two will have to work this out. It links back to why you are trading in the first place.
How do you decide which shares to buy and how do you set stops?
Answering this depends on how interested your partner is. The answer can get technical. I think you should take the time to explain in as much detail as your partner will tolerate. At least you will be able to show that you have an organised methodology and why you have chosen it. It is a good time to explain that no one can see the future.
What records are you keeping and how will I know how things are going?
You can show your spreadsheet for recording trading history, and agree that once a week you will sit down with your partner and show them what has happened. You can also track how you are going against your objectives. This will give confidence that you are both in control.
These are the questions that I identify as important. You can use them as a structure for your discussion with your partner. They might well have other questions and you need to be receptive to that.
I do understand that this process might be difficult. You are opening yourself to the risk of criticisms, which maybe entirely valid. Maybe your partner doesn’t want you to do this at all. Maybe the amount you are risking is too high for their comfort.
Whatever the outcome, it is better than the old ‘hide yourself in the study’ routine.
I mentioned above that I have just been through this experience with my partner. Her reactions were very helpful. She was impressed that I had a carefully thought out and comprehensive plan. She liked the idea of quantitative trading objectives and the emphasis on capital preservation.
She was happy that I was following a passion from which I obtained so much satisfaction. To her, this was almost as important as possible monetary gains.
The key factor for her was how much money we are putting at risk and how are we managing this risk? Clearly this would be a matter of priority for anyone. We discussed this carefully and came to agreement.
She now takes a positive and enthusiastic interest in my trading, which is very gratifying.
As a final thought, if you follow this advice, you may not only be setting up a harmonious environment for your future trading, you will also be subjecting your trading plan to a very rigorous appraisal by the person who has just as much to lose or win as you do.