Last Updated on August 11, 2020 by Rayner
Trading as a business.
That’s what you want, right?
To be able to start your own trading business from home.
But do you know what it takes to succeed?
(Hint: It’s not about finding the best indicators, trading strategies or timeframes).
Then what is it?
I’ll tell you more.
If you can’t answer this question, you’ve got no business trading…
Here’s the thing:
There are millions of businesses in the market.
And most businesses can be categorized as a high turnover business or a low turnover business.
A high turnover business usually has a small profit margin and they earn from the fast turnover of their inventory.
The faster they “move” their inventory, the more profits they make.
An example of a high turnover business is Walmart.
On the other hand…
You’ve got businesses with a low turnover but high-profit margin.
They don’t sell regularly, but when they do, the profit margin is high.
An example of a low turnover business is Rolex.
Now you’re wondering:
“How does this relate to my trading?”
If you think about it, the concept is the same.
Are you a high-frequency trader looking to capture a small move, or are you a low-frequency trader who prefers to catch a big move?
This is important.
Because if you don’t know what’s your trading business model, you’ll waste countless hours finding the “best” system that doesn’t exist.
So my question to you is…
What’s your trading business model?
Do you know the cost of doing business? (It’s not what you think)
Every business has a cost.
If you’re running a restaurant, you’ve got to pay…
- The salaries of your worker
- The rental of the unit
- Electricity bills
And it’s the same for trading.
Now, you might not have to pay for the rental of your office (if you work from home), salaries, etc.
But, there’s still a cost — and it’s the cost of losing.
I don’t care how good you are at trading, whether you have a $1m dollar account or a $10 account, you’ll face losses regularly.
And that my friend, is your cost of doing business.
But wait, that’s not all.
There’s another cost you must take into consideration.
What is it?
Your opportunity cost.
Here’s what I mean…
Let’s say you left a $60k /year job to trade full-time.
And as a full-time trader, you make $40k/year.
So how much did you make as a trader?
Did you say $40k?
You’ve lost $20k (60 – 40) because you could have been working elsewhere making $60k per year.
That’s an opportunity cost of $20k to you.
Don’t forget that.
How to protect yourself in “bad times”
Here’s a fact:
The market moves in cycles.
If you look back, there’s always a major recession once in a while.
And as a business owner, it’s a huge mistake to assume the economy will always do well.
If you’re a Gym owner, you might have seen your membership increase every year (for the last 5 years).
After all, times are good and people can afford to sign up a gym membership.
But what happens when there’s a recession?
Have you considered it?
How will it affect you?
I’ll tell you this…
Your memberships will decline because people stop renewing it — or even cancel it altogether.
So if you want to protect yourself, you must have enough cash flow to see through the difficult times.
Now, why am I sharing this with you?
Because it’s the same with trading!
The market is always changing.
It goes from an uptrend to downtrend, low volatility to high volatility, etc.
This means your strategy might work for a few months and then it stops working.
That’s why you must have enough cash flow to survive through the difficult times.
If you can do it, you’ve got a good chance of making it all back (and more) when the market conditions are in your favor.
If you want a ballpark figure, I recommend setting aside 12 months of living expenses (outside of your trading capital).
The ONE thing you must do to survive in this business
Let me share with you a real story.
When I was a proprietary trader, most of us trade the Nikkei Futures.
The reason is that Nikkei is traded on 3 different exchanges: SGX, OSE, and CME — which offers arbitraging opportunities.
Here’s an example…
Let’s say Nikkei is traded at 100 at SGX, 101 at OSE, and 100 at CME.
This means you can buy Nikkei at 100 from SGX or CME, and then quickly sell it at 101 at OSE — for a risk-free profit of $1.
Now, this was “easy money” back in the 2008 period.
However, with the rise of algorithms (which are faster than humans), these inefficiencies faded.
At this point, many traders left the proprietary trading business because their edge is eroded.
There is a small group of traders who are still trading to this day.
Yes, that’s right.
You must adapt to the markets if you want to survive in this business.
Your trading strategy might work for a few years and then suddenly, it stops working altogether.
And then what are you going to do?
Do you call it quits and blame the market?
Or, develop new trading strategies and adapt to the new market condition?
How to diversify your risk
When you first start a business, you’ll have one core product to fulfill the needs of your customers.
Amazon started with books.
Apple started with Mac.
Google started with search.
Amazon sells almost anything online.
Apple offers multiple products & services like iPhone, iPad, iTunes, etc.
Google has emails, business applications, and are developing self-driving cars.
Now the question is…
Why did these companies increase their product offering?
They want to diversify their risk.
They don’t want to rely on just one product because what if…
- There’s a new law that bans everyone from reading books
- There’s a new technology to look for information faster than a search engine
- A Mac exploded killing everyone in a 10km radius
I know these are exaggerations, but you get my point.
That’s why businesses tend to develop new products and services — to diversify their risk.
Now, what about trading?
Well, it’s the same!
As a trader, you’ll want to diversify your risk into different markets and strategies.
Take me for an example…
I started with Price Action Trading.
Then, I learned about Trend Following and how to ride trends across different markets.
And recently, I’ve developed systematic strategies to trade Stocks and ETFs.
Why is that?
Because I want to diversify my risk — so I can profit from the markets even if something fails.
Does it make sense?
How to start trading as a business — 5 powerful tips to dramatically increase your chance of success
Now if you want to start your trading business, then here are 5 powerful tips to increase your odds of success.
1. You must trade with an edge, here’s how…
Here’s the thing:
Because if you don’t have an edge, you’ll never make money — period.
You’re probably wondering:
“So how do I find an edge?”
Well, the easiest way is to find something that already works and adapt it.
Next, read books on these topics to understand the ins and outs of it (like why it works, how it works, and when it underperforms).
Now with the concepts you’ve learned, develop your own trading strategy so you can find an edge in the markets.
2. Grow your capital — the lifeblood of your trading business
Here’s the deal:
You need money to make money in this business, here’s why…
Let’s say, you have a trading strategy that makes 20% a year.
With a $1000 account, that’s $200/year.
With a $10,000 account, that’s $2000/year.
With a $1,000,000 account, that’s $200,000/year.
See my point?
You might have a strategy with an edge, but with low capital, it’ll lead you to take unnecessary risks — that erodes your edge.
Here’s an example…
You have a $1000 account and you make 20% a year.
The $200 is probably not enough to meet your needs.
So you have thoughts like…
“All this work for just $200?”
And the next thing you know, you take on too much risk and lose everything.
So, what’s the solution?
Grow your capital.
And if you don’t enough capital, get a job and save up — there’s no short-cut to it.
You might wonder:
“What about borrowing money to trade?”
Sure, you can borrow money to trade.
But the psychological pressure that comes with “money you can’t afford to lose” isn’t something I recommend.
3. Set aside 12 months of living expenses
I know you want to make consistent profits every month.
However, there are times when you just won’t make money.
Perhaps the market conditions aren’t favorable to you.
Perhaps you’re in a drawdown.
Perhaps you’re not psychologically ready to trade.
Whatever the case is, you want to have at least 12 months of living expenses covered.
So, even if you’re at your worst trading performance, you can live through it and not worry whether you have enough to put food on the table.
How much more liberated you’ll feel when you know you’re covered for the next 12 months.
4. Diversify your risk, here’s how…
You can trade multiple trading strategies so you can profit in different market conditions.
For example, Trend Following in trending markets and Mean Reversion in range markets.
Also, you can diversify your risk outside of your trading business.
- Have a fixed income job
- Work part-time (giving tuition, freelance, etc.)
- Have a side business (mentoring traders, referral schemes, etc.)
The possibilities are endless.
5. Always be a student of the market
Now in other industries, you might get away with learning a specific skill and using it for the next 30 years.
But, it doesn’t happen in trading.
The strategies you’ve learned 5 years ago might not work anymore, and if that’s your bread and butter, you’re toast (pun intended).
So, the only way to stay in this business is to be a student of the markets.
By learning from other traders, reading books, watching the markets, and testing new hypotheses.
If you can do this, you’ll never worry what the market throws at you because you’re always adapting — a hallmark of a lifelong trader.
Frequently asked questions
#1: Could trading on a demo account help me kickstart my trading business?
Yes for starters, trading on a demo account will familiarise you with the trading platform that you’re using. It helps you get familiar with the various functions like the buy stop orders and stop loss orders, etc.
But trading on a demo account will only get you so far because it doesn’t take into account the psychological impact of live trading. So once you’re familiar with the platform, you would have to move on to live trading.
#2: How can I know that my trusted strategy has lost its edge or if it’s merely having a bad losing streak?
I will first define the maximum drawdown that my trading system has, based on the backtested results.
If the system is currently in a drawdown but it has not exceeded its previous drawdown based on the historical backtest, then I wouldn’t be too concern about it. I’ll still continue trading the system.
But if it has exceeded the maximum drawdown, then I will start to dig deeper and try to find out the cause of the losses, if it’s due to bad slippage in the market, change in market condition, etc.
Trading is like any other business.
You must make a profit, manage your cash flow, diversify your risk, and adapt to market conditions.
I hope the strategies and techniques you’ve learned get you closer to trading success.
And finally, here’s my question to you…
How do you manage your trading business?
Leave a comment below and share your thoughts with me.