How to Approach Trading Like a Business

insight psychology Sep 07, 2017

1.   Start thinking of your trading like a business.

Even though trading is not a typical business, it is important to remember that it still is one – so if you want to become a successful professional trader, your first step should be to treat your trading like a business. If you neglect to develop a structured business plan that accounts for your costs, it will be hard to develop a strategy for a long-lasting career in trading.

Running your trading business properly can help to simplify key business decisions. If your revenue is higher than your costs, your business will be profitable – and if you lose more money than you make, you will be running at a loss and risk going out of business unless you correct the situation. So it’s important to plan ahead by assessing your costs, managing your risks, and developing a trading strategy that enables you to consistently run a profitable trading business.

2.   Take stock of your business costs.

Trading doesn’t have many costs, but it is important to keep track of them. Once you know what your costs are, you can plan to keep them at a manageable level. Remember, your objective is to profit by ensuring you bring in enough money from winning trades to more than cover your costs. Here are the main costs you can expect: 

·         Losing trades: Your main costs as a trader are the trades that you lose money on. Thinking of losing trades as a business cost will make it easier to separate objective decisions from your emotional responses – losing trades are part of the cost of doing business, and there’s no point in getting upset by your operating costs. At least a few losing trades are inevitable for every single trader, so account for them as an on-going cost in order to prepare yourself to address them.

·         Office: Budget for whatever office expenses you expect. This can range from a simple desk and chair along with a decent laptop, all the way to a dedicated office space with a deluxe computer desk, office chair, and top-of-the-line computer equipped with an array of monitors. As long as you meet the basic requirements of a reliable internet connection and a good computer, it’s up to you to decide how much to spend on office costs.

·         Broker Commissions: Every time you enter a trade, you will need to pay your broker a commission or spread – so make sure to plan for these costs as well. Of course, this can vary depending on what type of trader you are – the more frequently you trade, the higher your commission costs will be.

3.   Manage Your Risks

When you trade, it’s crucial that you manage your risks by using stop-losses. If you neglect to properly contain your trading costs, they can very quickly become a massive problem. If you want to have the money to keep trading – and especially to earn a full-time income – you need to make sure to protect yourself from excess risk. Fortunately, it is easy to effectively manage your risks so that losing trades don’t cost you too much. Once you become adept at placing stop losses, you will be much better at managing risk and at maximizing rewards – which will help you to turn more and more of your trades into winning trades!

4.   Create a trading strategy that turns a profit

As you know, your trading business is profitable when your revenue exceeds your costs. With a thorough, well-structured trading plan, you will already be ahead of most traders and on your way to a long-lasting career in trading. To ensure this happens, keep these key points in mind when you develop your strategy:

 ·         Learn how to read price charts well. If you don’t understand how to correctly gauge price action, your trading business will be crippled before it even starts. Every profitable trading business is built on a thorough understanding of price dynamics and trading on price action.

·         Make high-quality trades, not high-frequency trades. It is far more important to seek out high-probability trades that fit your strategy than it is to make a lot of trades. You will make more profits if you consistently seek out a few good trades instead of jumping into every trade that seems like it might be promising.

·         Prioritise money management. Rather than letting yourself get distracted by constantly analysing charts and tracking all the trading indicators available, put your efforts into containing your risk on each trade. This includes developing a proper trade exit strategy.

·         Maximise your risk-to-reward ratio. To help decide which trades are worthwhile, aim to enter each trade with at least a 2:1 reward-risk ratio.

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