How Trading Should be Run Like a Business

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Top 10 Rules For Successful Trading

Anyone who wants to become a profitable stock trader need only spend a few minutes online to find such phrases as “plan your trade; trade your plan” and “keep your losses to a minimum.” For new traders, these tidbits can seem more like a distraction than actionable advice. If you’re new to trading, you probably just want to know how to hurry up and make money.

Each of the rules below is important, but when they work together the effects are strong. Keeping them in mind can greatly increase your odds of succeeding in the markets.

Key Takeaways

  • Treat trading like a business, not a hobby or a job.
  • Learn everything about the business.
  • Set realistic expectations for your business.

Rule 1: Always Use a Trading Plan

A trading plan is a written set of rules that specifies a trader’s entry, exit and money management criteria for every purchase.

With today’s technology, it is easy to test a trading idea before risking real money. Known as backtesting, this practice allows you to apply your trading idea using historical data and determine if it is viable. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading.

Sometimes your trading plan won’t work. Bail out of it and start over.

The key here is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, is considered poor strategy.

Jack Schwager: Investopedia Profile

Rule 2: Treat Trading Like a Business

To be successful, you must approach trading as a full- or part-time business, not as a hobby or a job.

If it’s approached as a hobby, there is no real commitment to learning. If it’s a job, it can be frustrating because there is no regular paycheck.

Trading is a business and incurs expenses, losses, taxes, uncertainty, stress, and risk. As a trader, you are essentially a small business owner and you must research and strategize to maximize your business’s potential.

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Rule 3: Use Technology to Your Advantage

Trading is a competitive business. It’s safe to assume that the person sitting on the other side of a trade is taking full advantage of all of the available technology.

Charting platforms give traders an infinite variety of ways to view and analyze the markets. Backtesting an idea using historical data prevents costly missteps. Getting market updates via smartphone allows us to monitor trades anywhere. Technology that we take for granted, like a high-speed internet connection, can greatly increase trading performance.

Using technology to your advantage, and keeping current with new products, can be fun and rewarding in trading.

Rule 4: Protect Your Trading Capital

Saving enough money to fund a trading account takes a great deal of time and effort. It can be even more difficult if you have to do it twice.

It is important to note that protecting your trading capital is not synonymous with never experiencing a losing trade. All traders have losing trades. Protecting capital entails not taking unnecessary risks and doing everything you can to preserve your trading business.

Rule 5: Become a Student of the Markets

Think of it as continuing education. Traders need to remain focused on learning more each day. It is important to remember that understanding the markets, and all of their intricacies, is an ongoing, lifelong process.

Hard research allows traders to understand the facts, like what the different economic reports mean. Focus and observation allow traders to sharpen their instincts and learn the nuances.

World politics, news events, economic trends—even the weather—all have an impact on the markets. The market environment is dynamic. The more traders understand the past and current markets, the better prepared they are to face the future.

Rule 6: Risk Only What You Can Afford to Lose

Before you start using real cash, make sure that all of the money in that trading account is truly expendable. If it’s not, the trader should keep saving until it is.

Money in a trading account should not be allocated for the kids’ college tuition or paying the mortgage. Traders must never allow themselves to think they are simply borrowing money from these other important obligations.

Losing money is traumatic enough. It is even more so if it is capital that should have never been risked in the first place.

Rule 7: Develop a Methodology Based on Facts

Taking the time to develop a sound trading methodology is worth the effort. It may be tempting to believe in the “so easy it’s like printing money” trading scams that are prevalent on the internet. But facts, not emotions or hope, should be the inspiration behind developing a trading plan.

Traders who are not in a hurry to learn typically have an easier time sifting through all of the information available on the internet. Consider this: if you were to start a new career, more than likely you would need to study at a college or university for at least a year or two before you were qualified to even apply for a position in the new field. Learning how to trade demands at least the same amount of time and fact-driven research and study.

Rule 8: Always Use a Stop Loss

A stop loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop loss can be a dollar amount or percentage, but either way, it limits the trader’s exposure during a trade. Using a stop loss can take some of the stress out of trading since we know that we will only lose X amount on any given trade.

Not having a stop loss is bad practice, even if it leads to a winning trade. Exiting with a stop loss, and therefore having a losing trade, is still good trading if it falls within the trading plan’s rules.

The ideal is to exit all trades with a profit, but that is not realistic. Using a protective stop loss helps ensure that losses and risks are limited.

Rule 9: Know When to Stop Trading

There are two reasons to stop trading: an ineffective trading plan, and an ineffective trader.

An ineffective trading plan shows much greater losses than were anticipated in historical testing. That happens. Markets may have changed, or volatility may have lessened. For whatever reason, the trading plan simply is not performing as expected.

Stay unemotional and businesslike. It’s time to reevaluate the trading plan and make a few changes or to start over with a new trading plan.

An unsuccessful trading plan is a problem that needs to be solved. It is not necessarily the end of the trading business.

An ineffective trader is one who makes a trading plan but is unable to follow it. External stress, poor habits, and lack of physical activity can all contribute to this problem. A trader who is not in peak condition for trading should consider taking a break. After any difficulties and challenges have been dealt with, the trader can return to business.

Rule 10: Keep Trading in Perspective

Stay focused on the big picture when trading. A losing trade should not surprise us; It’s a part of trading. A winning trade is just one step along the path to a profitable business. It is the cumulative profits that make a difference.

Once a trader accepts wins and losses as part of the business, emotions will have less of an effect on trading performance. That is not to say that we cannot be excited about a particularly fruitful trade, but we must keep in mind that a losing trade is never far off.

Setting realistic goals is an essential part of keeping trading in perspective. Your business should earn a reasonable return in a reasonable amount of time. If you expect to be a multi-millionaire by Tuesday, you’re setting yourself up for failure.

Conclusion

Understanding the importance of each of these trading rules, and how they work together, can help a trader establish a viable trading business. Trading is hard work, and traders who have the discipline and patience to follow these rules can increase their odds of success in a very competitive arena.

Run Your Trading Like a Business

Trading is quite different from other businesses, but it is still a business and you need to run it like one and think of it as one. Most traders start out on the wrong path right out of the gate by treating their trading like a trip to the casino rather than a business that requires structure and planning and which has real costs associated with it.

If you want to succeed as a trader, the very, very first step, is running your trading like a business and viewing it as one.

Just as with any other business, the way you make profit as a trader is by bringing in more revenue than your out-going costs. Also, like any other business, the way you lose money and ultimately go out of business, is if your costs are larger than your revenue.

Your costs of doing business in the market

  • Losing trades

The main costs of running a trading business are losing trades. Yes, that’s right, losing trades are and should be thought of as a cost of running a trading business. It is critical you view them this way, because it helps you to become less emotionally influenced by losing trades. Think of it this way; a restaurant owner doesn’t get sad or angry when he has to re-order food or pay his employees, because he knows those things are just the costs of doing business.

So, your biggest cost of business as a trader are the losses you take from losing trades. Every trader on Earth, no matter how profitable, has losing trades. You cannot avoid them, so just accept that you will have to deal with the cost of losing trades and rather than try to avoid them, learn how to deal with them properly, but you must accept them as an on-going cost first (more on how to deal with this cost later).

Another smaller cost associated with trading is that of broker spreads or commissions. This will be an on-going cost for you and you should remember that every time you enter a trade, you are paying a spread or commission to your broker. This is a real cost and you should think of it as such. Obviously, day-traders who trade very frequently have much higher costs related to spreads or commissions than do swing traders like me (and you, I hope).

  • Set up a trading office

The next biggest cost you will have as a trader is setting up your trading office. Now, this cost can vary greatly from trader to trader, but at the very least, you will need a good laptop and a computer desk and chair. Some traders may opt for a multi-monitor computer setup and an expensive computer desk and chair, which obviously could get very expensive. However, this is not necessary to trade profitably. All you really need is a good laptop and an internet connection.

  • The good and bad news about trading costs

Ok, now that we have discussed the primary costs of doing business as a trader, let’s first discuss the good news about them. The good news is that you know what your costs are and there aren’t very many of them. Also, you can contain your costs as a trader very easily and effectively. This containment is done by managing your risk as you trade. This means, not risking more than you can truly afford to lose on any one trade, which is done by using stop losses of course. Knowing how to properly place stop losses will also be a big factor in managing risk and also in maximizing reward. A properly placed stop loss can be the difference between a losing trade and a winning trade in many cases.

Now, for the bad news about trading costs. If you do not manage them and contain them properly, they can grow out of hand, very, very quickly. In fact, if you don’t manage your risk properly as you trade, you can end up losing all of your trading money very, very fast, faster than in other businesses for sure.

Knowing this bad news about trading costs, it should make you re-read the previous paragraph again on the good news of trading costs, and remind yourself that these costs can effectively be managed and contained, but it’s up to YOU to do it!

So, now you know the primary costs of running your trading business, now there might be others, but these are the biggest ones for most traders. Your goal is to make sure that you make enough money from your winning trades (revenue) to cover all your costs and then some, so that you make a profit.

How to make your trading business profitable

Now, it’s time to learn how to run your trading business at a profit, rather than a loss. There is obviously quite a bit that goes into being a consistently profitable trader, and I can’t cover everything in one short article, but I will give you a brief run-down of the main things you need to focus on. For more information, check out my trading course.

As mentioned previously, a trading business runs at a profit when the revenue (money from winning trades) is offsetting the costs (losses, office setup, etc.).

The question then becomes, what can you do to make sure your trading revenues far surpass your trading costs? Here is an overview:

  • Focus on risk to reward ratio On every trade you take, you need to decide if the risk reward potential is enough to make the trade worthwhile. You need to be sure at least a 2R or greater reward is possible whilst making sure you have your stop loss placed properly.
  • Don’t trade a lot – You don’t need to trade with high frequency to make money. You need to instead focus on learning to trade properly, on taking high-quality / high-probability trades. This is the point I make in my articles on trading like a crocodile and trading like a sniper.
  • Focus more on money management than anything else – By money management, I mean managing and containing your risk per trade and also on making sure a 2R or greater reward is possible and also on trade exits. Most traders focus too much on entries and waste of time things like trading indicators, when in reality, they should be far more focused on money management.
  • Make sure you know how to read price action properly – Finally, if you don’t understand how to read a price chart, you aren’t going to get very far. The basis of any successful trading business is understanding price dynamics and how to read and trade from pure price action.

Conclusion

What I want you to do next, is create a trading plan. A comprehensive yet concise trading plan is necessary for running a successful trading business. You can’t just ‘wing it’ and hope for the best. This is what most traders do and how do most traders end up? Losing money and eventually dropping out.

For more in-depth help on building your own trading plan and on all of the topics discussed in today’s lesson, check out my trading education course and members’ community.

How to Start a Small Trading Business

Canadian Day-Trading Rules

So, you’ve become an expert at buying and selling stocks. You have that natural instinct that some of the best traders seem to have. As you ride the wave of power that comes from watching your money grow, you may entertain the idea of giving up your day job to trade full-time. Or maybe the best way to make the most of your talent is to help others successfully build their own portfolios. Either way, before getting started, it’s important to follow all of the required steps to give yourself the greatest chance of success.

Trading on Your Own

If your goal is to go full-time as a day trader, with no plans to take on clients and personally manage their portfolios, you’ll need a surprising amount of capital. Pattern day traders, defined as traders who initiate four or more day trades within a one-week period, are required to have at least $25,000 in equity in every account they run. As a pattern day trader, you’ll only be allowed to trade on margin accounts. If, at any time, your account falls below $25,000, you’ll be required to pause all-day trading until you’ve put enough money into the account to maintain that minimum.

One positive of pattern day trading, though, is that you’ll be allowed to trade at as much as four times your maintenance margin excess, whereas standard margin accounts are only allowed to trade up to double the margin excess. This can be good and bad, though, since it puts you at risk of a large loss.

Trading as a Business

Trading for others is a bit more complicated. You have to pass an exam before you can start trading for the public. If you’re selling annuities or mutual funds, you’ll need to pass a Series 6 exam. To sell securities directly, you’ll have to take a Series 7 exam. There may be other requirements for trading in specific industries. You should also consider becoming a member of Financial Industry Regulatory Agency, or FINRA, where you can register your business name and get the support you’ll need as you build the new business.

In addition to taking exams, you’ll need to check the requirements for getting a business license with your state or local agencies, along with submitting your information to the Securities Exchange Commission using Form BD. If you plan to sell stocks in more than one state, you’ll need a separate form for each state you’ll be trading in. There may also be special requirements for broker-dealers in your own state, so check on those before you begin accepting customers.

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