How to treat trading as a business
Running a trading business is definitely simpler than most businesses out there. No physical location, no employees, no inventory (besides capital) and the sky is really the limit to growth. Because it's so easy to start, it's also easy to get sloppy in managing it leading to an early close. The benefits of treating your trading as a business are many, most importantly, you'll get better results. Does a CEO of a company look at only sales numbers at the end of the day to measure the success of his/her business? No, lot's of variables are taken into account to know the health of the business and most importantly, how to increase sales. Unfortunately, most traders only care about profits and losses.
In this post, I'll go over a couple of important aspects of a trading business so that you can treat your trading like one.
Track your expenses
It's great to see you made $10k for the month, but you don't know how much is due in taxes, or how much you spent on fees, rent, equipment, internet, electricity, and all the bills that any business has. It's important to track every cent that goes in and out of your business so that you'll know how much you are making in net profits. Tracking expenses will also help you offset your taxes when due.
Know your trading metrics
What's your monthly or yearly return? Expectancy rate, profit factor, profits and losses? What tickers or asset classes are generating most of the profits? What strategies are bringing the most profits? The least? Are you better going long or short? Day trading or swing trading? What about your losses? Can you stop them? All these insights are invaluable to understanding your business. You can use a spreadsheet to start or a proper and more sophisticated tool like a trading journal.
Review your numbers
Tracking your trading metrics is one thing, but reviewing is another. If you don't review them, you can't improve. You must know how to analyze the numbers and optimize them so that you can make smarter trading decisions based on statistical evidence of what works.
Run your business with reason, not with your emotions
Like every business, there will be good months and bad months. You might even have many bad months before you have good months. Understand and accept it, otherwise, you'll be making decisions based on your emotions, and as you may well know, trading isn't a business to be run on emotions, but on discipline and reasonable trading decisions.
Invest in the right equipment
Like I said earlier, trading doesn't require too much upfront capital. Leverage is cheap and some instruments can be traded for pennies. I remember when I started skiing, I bought the worse equipment I could afford. I ended up hating it because I was miserable. My feet bled, I was freezing and I fell many times. If you start trading without the right trading equipment, you'll have a bad experience too and it's not going to be as enjoyable. When you are hoping to spend 8-12 hours a day doing something, invest in the best equipment you can buy.
Establish a company
Don't mix personal taxes with your business. As soon as possible, move your trading to a corporation or LLC. Depending on the setup, it will save you taxes and will protect your personal assets.
Know the rules of the game
Lots of traders start by trading, then they get charged with huge locate fees, margin calls, interests and they have to learn about all these the hard way. Not to mention, they break important rules such as pattern day trading, wash sales and overnight margin requirements, and when they realize they broke these rules, it's typically too late to avoid the huge and unnecessary bills. Invest in proper education before you start and save yourself a ton of time and money in the process.
Have a business plan
A business plan is like a business blueprint. What you write in it is what you expect from your business. Your mission, your goals, your objectives, your rules and how you'll run it. You can always review and improve it but stick to it because it's your written plan to succeed.
Start with the right mindset
Expect to work harder than a normal job, much harder. Put in the hours, expect no returns for the first few months or even years, and invest in yourself by learning how to trade with professionals. Connect with other traders so that you can share your experience, participate in webinars, be on the lookout for new trading tools and equipment. Odds are not in your favor, most businesses fail within 3 years regardless of what industry they are in. If you want to be in the 97%, do things that only the 3% are willing to do. Never give up! Trading is not a get-rich-quick scheme, it's a business just like any other. Regardless of what happens, keep a positive attitude and live up to your dreams and expectations.