Trading is a Business: Here’s How to Build a Successful One

  • June 8, 2001
  • Daniel Beighley

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.  




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. 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.

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