Lesson 6

Trading Is A Business: Here's How To Build A Successful One
By Daniel Beighley

TradingMarkets.com

I’ve heard all kinds of market theories -- from pyramids, moon cycles and tidal currents to astrology -- and I wouldn’t criticize anything, as long as it actually worked. What I do believe is that trading is run best when it is run as a business. This lesson is about maximizing trading strategies for the purpose of meeting your goals as effectively and efficiently as possible. Once I began running my trading as a business, I experienced a profound change in my results. I found it a lot easier to manage things and gained a better grasp for obtaining my goals. Whether you are handling billions or just a part-time enthusiast, utilizing good old-fashioned business principles will keep you focused and on the road to where you want to be. O:P>

As a trader, your ambitions are similar to those of any business owner: You exist to turn a profit. Your decisions are entirely yours, and your aim is to buy low and sell high. With this is mind, it is important to look at your trading as if it were a business. The truth is most businesses fail because they don't properly prepare themselves with a good plan.

People who think they can walk into the markets and just "get lucky" would be better off gambling. In the market, forces of supply and demand are constantly affecting your outcome. You need to pit yourself against your competitors to the best of your ability. Seasoned traders will quickly take advantage of the naive, but if you center yourself with a plan, you will be able to operate more effectively. Just like a business plan, traders should have their entire strategy outlined.

While owners of Krispy Kremes have to deal with issues such as cost of labor, customer service, marketing, and location; individual traders have the freedom to buy and sell at their own discretion. For traders, there is almost always a flush supply of buyers and sellers. There are also no hassles of producing a product or service. Krispy Kreme owners must put up $750,000 capital for each store, while a trader can start with far less. Despite the differences, the main objective remains the same, you want to make the most of your capital.

Old pros will tell you that discipline and objectivity are crucial for long-term success. Aristotle came up with this notion over 22 centuries ago -- and it’s no different today:

“First, have a definite, clear practical ideal; a goal, an objective. Second, have the necessary means to achieve your ends; wisdom, money, materials, and methods. Third, adjust all your means to that end.”

Below is a five-point outline for running your trading as a business:

  1. Define Your Business
    This is where you give a precise description of your purpose as a trader. An example would be: “The purpose of my trading is to sustain myself." This description may change as your business grows and you possibly begin trading for others. You might want to consider giving your business a name. Charles Schwab had to start somewhere.

  2. Have A Mission Statement
    Here is where you give a detailed description of your trading and the direction you want to take it. An example would be “I will trade in accordance with the guidelines I know to be risk-averse and likely to succeed. I will commit $100,000 in capital. I will not use margin. I will only trade securities and hedge with options. I am an intermediate-term trader. I will remain disciplined, objective, flexible, and risk-averse.”

  3. Outline Your Goals
    In this section, you will outline your financial goals -- using the time frames in you would like to achieve them. For example, “My goal is to be profitable every month. I want to achieve a 30% return on my capital per year. In five years, I want to manage other people's money as well as my own.” The more specific you are here, the better.

  4. Create Your Business Plan
    The most important part of your business is your plan. The idea here is to write a Code of Conduct for yourself. You should define your strategy in such way that you know exactly how to react in every situation. This section may be lengthy, depending on your trading strategy. An example would be, “If a stock goes down on twice normal volume and trades at an average of over 300,000 shares a day, and is priced over $15 a share, I will short it for the purpose of gaining 1 point, but will let it ride if the momentum is there.” Of course, in the world of trading it is difficult to make an exact science of things, but your plan should be designed to capture as much success as possible. This section is also where you define your money management techniques.

  5. Have Plan "B"
    This is where you map an alternate to your original plan. This isn’t part of the real plan, but it’s always smart to have something to fall back on. A good thing to do is pre-define the amount of capital you are willing to risk. If you lose it, stop trading until you find out what’s going wrong and are able to correct it.

Creating a business plan and being able to verbalize and visualize your plan of attack will give you a powerful edge. You should be able to clearly define every aspect of your route to success. A business plan may also be used to show potential clients if you want you to manage their money. You will also find that having a business plan will help identify your strengths and weakness. For example, if a certain strategy appears to not be working, you will want to examine alternative methods. When the Nasdaq tide changed from a bull to a bear, I quickly realized my strategies weren’t working and realized I had to change something. Always be moving to achieve your goals. In a previous lesson on Over-trading, I discussed the importance of keeping a journal. Used in conjunction with a business plan, a journal will keep you trading as efficiently as possible.

Keeping a balance sheet is another important component for trading as a business. Having a clear picture of how you are managing your money is a necessity. Below is an example of a spreadsheet made with Microsoft Excel:

Spreadsheets make it easy for a trader to calculate the buys, sells, taxes, and broker fees. All you need to do is enter the dates, symbols, and orders. The spreadsheet will do the math and give you a bottom line. I’ve rigged mine so monthly living and business expenses are factored in as well (not shown on image above). This especially comes in handy around tax time. You will want to be sure you are making enough after taxes to meet your goals. Tax deductions are another issue to consider. Being self-employed gives you many opportunities to deduct business-related expenses. I know they change the laws every year, but at present you can deduct the percentage of your home you use as office space. You could also do what Mark Boucher does and avoid taxes by going off-shore. It’s also possible to run statistics on your progress for a more detailed description. I will leave that for another lesson.

A business perspective should also be used to make decisions regarding your trading tools. Weighing the pros and cons, choices of computer hardware and software, quote data, news sources, and brokerage firm should be carefully considered. Depending on how active you are as a trader, you will need to make sure your purchases are in the best interests of your needs. For example, someone making hundreds of trades a day will need a higher-powered broker than someone only trading a couple of times a week. Take a good look at how you are using your tools and ask yourself how valuable they are to you. How much bang are you getting for your buck? Do you really need to pay the above-average broker fees? Is there a more cost-effective data service? Keeping track of this on a spreadsheet will also help clarify these issues.

Your working environment is another concern for your business plan. In my opinion, it is important to create as professional a workplace as possible. To rent office space or not will vary, depending on the person. Being a trader gives you the cost-efficient luxury of working from home, but it’s not always the best decision. For some people, a home office is convenient, but for others it’s a distraction that takes away from productivity. Again, take a good look at how valuable your workspace is to you and look into alternatives. If I realized I was wasting two hours a day commuting to an office, I would think about the benefits of working at home. In the same way, if I noticed I was wasting two hours at home, I would consider moving into an office. Time is money.

Summary

Having a business plan for your trading will make you a more effective and efficient trader. By defining exactly what you are doing and where you are going, you will be able to put yourself in the best position possible to achieve your goals. Discipline and objectivity are best achieved when you have something concrete like a business plan to center yourself with. I also believe motivation is directly tied into setting a good goal for yourself. So, if you haven’t already made a business plan for your trading, you should give one a try.