Unfortunately, there are too many traders that treat trading like going to the casinos.
And this costs them dearly.
As a new trader, it’s important to get into the mindset that trading is actually a business!
In trading, just like any business in your town, there are costs and expenses that must be met—if you want to keep the lights on.
And almost all new traders fail to understand this simple concept!
First off, why do so many people want to start their own trading business?
Well, it comes with a ton of perks!
Some perks of trading are:
Unlimited income potential
No boss to report to.
Work from anywhere
No bull sh*t to deal with.
No annoying office politics.
Unfortunately, like other startups, it does come with some hard work and elbow grease.
Do you know what it takes to succeed?
(Hint: It’s not an indicator, a trading strategy or time frame.)
Here’s the thing…
Many people treat trading as a game instead of a business.
And that always leads to failure.
Trading is more than gambling…
Trading is an actual business and can generate as much income as you want.
Like every company, the owner must understand what the business model is and focus his efforts to maintain that plan on a daily basis.
Let me explain…
Businesses can be categorized in many different ways.
For example, a coffee store that focuses on high turnover or a boutique watch company that puts quality over quantity.
In the coffee industry, the faster you sell coffee the more profits you make.
And in the boutique watch company, you may not sell regularly, but the profits are high enough to make the same profit as the other coffee business.
So how does this relate to trading?
Remember I said trading is a business that requires a plan to follow every day?
Well… if you think about it, the concept is the same.
As a high-frequency trader, you look to focus on a high turnover of your inventory (coffee or stocks) to generate a quick and small income per trade.
As a low-frequency trader, you look to focus on a low turnover of inventory (watches or stocks) to generate a slower and larger income per trade.
This is important to understand.
Because if you don’t understand the business you wish to be in, you’ll end up wasting countless days finding the “best” system.
Hint… The “best” system doesn’t exist! You want to find the ideal system that fits your business model and specific needs.
Do you know the true costs of trading?
It’s ok if you don’t… since most traders do not.
Let’s take a look and see what they are.
The Cost Of Doing Business
Every business has a cost to keep the doors open and lights turned on.
If you are running a coffee shop, you have to pay:
- Salaries of employees
And it is the same for trading….
In an example trading business, you have to pay:
- Market data
- Platform costs
- Brokerage fees
- Margin rates
- Interest rates
But there is an added loss many forget about…
Do you know what the cost of a losing trade is?
Because at some point, you are going to lose money. No matter how good you are, at some point, it is bound to happen. And that needs to be accounted for.
Another hidden cost is the opportunity cost. As with everything in life, there is a cost from your decisions.
Let me explain…
Assuming you had a job prior to trading and you made $60,000/year and as a trader, you are making $50,000/year.
Even though you are profitable as a trader, you are making less money than if you stayed at your previous job.
Therefore, you lost $10,000/year and that is a cost that has to be accounted for in your business plan.
How To Protect Your Business In Slow Times
Many traders begin their careers at the top of the markets and at the top of their earnings.
There are many times I have heard traders talk about the “good old days” when they are in a slump they cannot escape.
It’s extremely common for traders to earn the most money in their first year of business.
Well, this happens for many reasons. Some are :
- They have fewer bills to pay
- They have a residual income from previous employment
- They take the most amount of risk in the first year
But the markets go in cycles with some years outperforming others.
And as a business owner, it’s a huge mistake to assume the economy will always do well.
For example, if your business plan is to go long stocks for growing companies you will do great in a booming economy.
But…how do you generate income during a contracting market in a recession?
Most likely, you cannot. And this is why a trader needs to protect his business.
Like other business owners, you want to make sure you have enough cash flows to see it through the difficult times.
If you can survive the downswing of the markets there is a good chance you can make it back and much more when the market conditions are in your favor.
So how do you do this?
It’s primarily done through diversification and savings.
For example, if you are a stock trader, you might want to consider diversification of your assets. One way to achieve this is by taking 25% of your assets and putting them into a stable bond portfolio. This will be helpful for a rainy day.
Another way to protect your business is to set cash in an account that you do not trade on. For example, take 12 months of all expenses and set aside enough cash to pay the bills in the event you do not generate any income for an extended period of time.
It’s important to always remember that the markets go in cycles and bad times are followed by good times.
The One Thing You Must Do To Make It
There was a friend who was trading these wild high-flying technology names throughout the late 1990s during the dot-com era.
And I need to say, he was one of the most profitable traders outside of Wall Street I have ever seen.
Not only was he able to pick the right stock, but he also seemed to have a sense of what stocks were going to explode that day and get into them.
The wolf of wall street from a sleepy old town.
Until the bubble burst.
He lost almost all of his earnings, his house, cars and had to close his business.
Why did this happen?
Well, as the dot-com era ended, he didn’t get trapped in trades but instead couldn’t find his next trade to make money on.
He searched, and searched to find that next stock that would pop… but nothing ever happened. And as he traded, he soon turned it into gambling, betting larger and larger until he couldn’t lose any more.
So what’s the point here?
It’s called change.
As a business owner, you need to be “in tune” with your customers and markets.
Say you notice your customers are starting to favor tea over coffee, what can you do to make money while sales are slumping? Well, maybe it’s best to bring in additional flavors of tea to sell to your customers that will increase your sales while coffee sales are slumping.
This is how business changes and many traders cannot seem to do this.
They get “stuck” in their trading methods unwilling to accept that times have changed. Unwilling to see that their current strategy no longer works and they need to find something else.
Traders need to adapt to the markets instead of being rigid in order to maintain a positive cash flow for their business.
This is done by continuously learning and developing new trading strategies that are adapted to the new market conditions.
Diversify Your Business
Maintaining the course is not a plan for when your business is starting to struggle.
Instead, a business owner needs to begin understanding the markets and how they can begin to bring in additional revenue streams.
In the prior example, the coffee shop business had to increase tea sales during a slumping coffee market. This is an example of diversifying your business.
And it’s extremely important to understand this concept as a business owner.
For example, if you own a trading business and your revenue starts to slow down, it is important to find additional sources of income to pay the bills and keep the doors open.
How would a trader go about diversifying their business?
By developing additional strategies that take advantage of the new market conditions. If momentum trading fails to generate income then it’s possible a mean reversion trading strategy is needed.
5 Tips To Increase Your Chances Of Success
So you still want to start your own trading business?
So here are 5 extremely powerful tips that will increase your odds of success.
You Must Have An Edge
Here’s the deal…
It doesn’t matter if you have emotions as hard as steel and the tightest risk management techniques… without an edge it’s meaningless.
Simply put… every trader needs an edge in the markets to make money – period.
So how do you find an edge?
Well, it’s to continuously study the markets or find something that works and adapt it to your trading.
- Mean Reversion
- Trend Following
- Dividend Growth
- Options Selling
Once you have identified which strategy fits with your business model it’s important to understand the in and outs of the strategy, why and how it works, and when it fails to outperform the markets.
With that information, you are then able to understand exactly when to apply a trading strategy and give your business an edge in the markets.
Grow Your Capital
Now, this might seem obvious that you want to grow your capital, but unfortunately, many traders fail to understand how to do that.
Let me explain…
You need money to make money in this business, right?
For example, you need to make $250/day to justify your business and your assets under management are $10,000.
Let’s see how this breaks down…
$10,000 AUM :
$250/day x 252 trading days per year = $63,000 / year income
Most markets return 20% / year.
Therefore $10,000 x 20% = $2,000
$2,000 / year returns are a long way away from $63,000 / year income to run your business and pay bills.
In order for that to work, on $10,000, to return $63,000, that is roughly 6.3x your assets, or 630% returns.
That’s nearly impossible.
Let’s see what happens with more assets under management.
$250/day x 252 trading days per year = $63,000 / year income
20% / year return
$1,000,000 x 20% = $200,000
Now we are looking at a more realistic number.
This leaves $200,000 – $63,000 = $137,000 of profits in your business every year
See my point?
If you have a strategy with an edge but have low assets under management, it will lead you to take unnecessary risks to return an unachievable 600% per year.
Next thing you know you are taking on more risk to return the needed capital to run your business, putting your entire business on the line to lose everything.
So what’s the solution?
Grow your capital.
This can be done by either finding additional income streams or bringing investors into your business. Remember… Many businesses have multiple owners to share in the costs.
Set Up A Rainy Day Fund
Now that you see you need money to make money… you also need to save money to make money.
Let me explain…
Without an edge that works in every market condition (which usually comes with over 10 years of industry experience or more), you will be hard-pressed to remain profitable year over year.
Mix in poor markets, psychological stress from trading, and other bad habits… the next thing you know you could be taking higher losses than average.
Whatever the case may be, it’s important to have at least 1 year of business expenses and living expenses put away.
This way, even if you are at your worst trading performance, you can live through it and not worry about where you are going to find the money to put food on your table for your family every day.
In some industries and jobs, you can get away with learning a specific skill set and using it for 30 years.
But in trading, this is not the case… since the strategy you learned 5 years ago might not work anymore.
By continuously studying the markets you will be able to identify what is profitable and start putting it to work right away.
So the only way to stay in business is to be a student of the markets.
By learning from other traders, reading books, watching the markets, joining chat services, and testing new ideas.
Unfortunately, there are no shortcuts in life and the same goes for trading.
If you can do this, you will never have to worry again about what the market throws at you because you’re always adapting and growing as a trader and as a business.
Remember…trading is like any other business.
In order to be successful in your trading business, you must:
- Have an edge
- Make a profit
- Properly manage your cash flows
- Diversify your risk
- Adapt to changing market conditions
- Raise capital
And once you master one trading strategy it’s time to start learning a new one.
So… My question to you is…How well do you manage your trading business?
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