When we talk to prospective students about learning the skill of trading, we also encourage them to treat trading like a business.
If you start any type of business you first have to come up with the initial seed capital to get the business off the ground. This comes with the understanding that there’s always risk because there’s never a guarantee that the business will prosper. With any traditional business we will always be subjected to the vagaries of the economy, litigation, and growing competition in whatever field we decide to venture into. This makes starting a business for many people somewhat challenging.
One of the advantages of using trading as a vehicle for generating income is that once a skill is learned, all of the aforementioned challenges that a traditional business faces no longer apply. If you learn how to trade properly, any market condition can be fruitful because you have acquired the skill of trading in up, down, and sideways markets. Trading presents other challenges of a personal nature, such as the focus and discipline required to execute the strategy. And for these reasons, just like a traditional business there are never any guarantees that it will be successful.
When thinking about treating trading like a business it is also important to draw parallels to traditional business endeavors because just like selling a service or a piece of merchandise you need to know who you’re competing against. In the markets there are two distinct groups. Of these, one is always struggling while the other is always making profits. Doesn’t seem like a level playing field, does it? But that is the reality. Obviously, thinking like the profitable group (banks and institutions) makes sense. So how do you go about doing this?
In a traditional business environment you can start on your own and try to compete against well established businesses. You will probably have a tough time of it unless you innovate and figure out what these more successful enterprises are doing and hope that you have enough capital to weather the start-up phase of your business. An alternative would be to look at a business that has a track record of success. Some of these will offer their business model in what is called a franchise. The company will support and teach the model to the franchisee for a payment called a royalty. Ultimately, it’s up to the franchisee to apply the proven systems in their own business in order to succeed. There is an advantage in doing it this way because usually the business brand is established and therefore there is a built-in clientele as soon as the doors are open.
We can draw parallels in the trading realm. You can go out and try figuring this out on your own, or you can learn a proven system that has produced results over long periods of time in many different market conditions. There is a learning curve and the results and individual results are predicated on how well the practitioner follows rules.
A business plan is an essential component for starting a business; traders must have a plan of similar nature. This includes a mission statement: the driving motivation of why we want to trade. Yes, it is money, but we need to take it deeper. Let’s remember that money is just a means of exchange to get us a better lifestyle. That may include material possessions or simply piece of mind knowing that our financial needs are met. We need to determine specific objectives and the specific financial instruments that will be utilized. Secondly, we must have a clear and concise strategy that objectively defines low-risk entry and exit points with a high probability of success. And lastly, a set of risk management rules is paramount if one is to stay with trading for many years.
By in large, being smart in any business endeavor means keeping expenses low, and profit margins high. In other words, keeping losses small and letting winners run. Unfortunately, too many new traders look at trading as a get rich quick solution and don’t treat it as they would a legitimate business venture in which profitability comes only with lots of work, discipline, and dedication, and the proper training. For those of you that are already treating trading as a business, I commend you for your courage, dedication, and hope that your trading prospers for many years to come.
Until next time, I hope everyone has a great week.