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Yes, Give it to me

Trading as a Business — The Essential Guide 

Last Updated: October 28, 2020

By Rayner

Trading as a business.

That’s what you want, right?

To be able to start your own trading business from home.

No boss.

No BS.

No politics.

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.

Read on…

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.

I’ll explain…

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
  • Groceries

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?

Nope.

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.

For example:

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.

However…

There is a small group of traders who are still trading to this day.

How?

They adapt.

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.

For example:

Amazon started with books.

Apple started with Mac.

Google started with search.

Now…

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?

Simple.

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?

Good.

Moving on…

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:

I don’t care if you have the best trading psychology or the tightest risk management.

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.

For example:

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.

Next…

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

Now…

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.

Imagine:

How much more liberated you’ll feel when you know you’re covered for the next 12 months.

Next…

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.

For example…

  • 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.

How?

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.

Conclusion

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.

  • Sir…this is a great insights….Thanks for sharing sir…
    Answer to your question: How do i manage my business is by:
    1. Trade Management.
    2. Emotional management.
    3. Risk management and
    4. Money management.
    Always the best Mr Rayner.

  • An excellent article as always but I have a question. You said in another post that the very best traders would only earn 20% on risk capital deployed a year. So for many people this means having capital of 1m (deployed) just to overcome the opportunity cost plus another hundred thousand or more to cover living expenses for a year. Most people will never be able to save up that much just to begin, and from your bio it doesn’t seem like you did either, yet here you are as a profitable full time trader. Now I’m not interested in “I turned $200 to $1m in 3 months sales pitches” but I seem to be missing something here (other than your education side business). So, what’s up my friend? What am I misunderstanding?

  • So true Rayner, trading has to be treated as a business for success, and then there is no guarantee, but the odds are on your side: because you look at it much different than just regular trading.

    Thank You

    Bill Latham

  • Thanks for the article, however, I rather stay with the $40k salary as a trader being the boss of my own with lesser tax than the $60k with all the hassle in the job plus paying more tax
    Here in Canada, taxes are a big impact, as you go with a hight bracket salary the more tax you pay to the govt!

  • First ever I heard ,trading can use as a carrer opportunities. Thanks Rayn. I was finding this answer from a long time. Thanks again

  • Hello Rayner, interesting article and the most important truth. We must take into account that this is a business and as such we must manage it, many people do not understand the opportunity cost, or initial working capital to meet fixed costs for a certain period of time, according to the flow of funds that I have raised; in short so many things that involve in setting up a business.
    Working without pressure is the most important thing in trading, knowing the business is a second point, having a strategy that works for me point three and always being updated, that is, studying every day.
    Thanks Rayner for sharing with us, see you.
    translated by Google

  • Hi Rayner

    Great article as always!

    When most people start businesses they write a plan and trading is no different the plan doesn’t have to be complicated however most brand traders do just that they over-complicate things for themselves and that’s when they run into trouble.

    I agree with and like what you said about about the cost of doing business. I always tell the traders I help out to always remember that trading isn’t free they still have expenses like fee’s, commissions and settlement fee’s they have to pay to make their money and the MORE you pay in fee’s the LESS you have to build your wealth wouldn’t you agree.

    NO EDGE = NO MONEY for sure!

    I hope this helps

    Good luck with your trading and investing and remember: Trade smart…OR JUST DON’T TRADE!

    Stock Trading Blogger

  • Under point 5 : Always be a student of the market, the sentence “the strategies you’ve learned 5 years ago might not work anymore”. As there is no sure 100% win in trading, how do you know that your trusted strategy has lost it’s edge ? For all you know, you may be having a very bad losing streak. Is there a quantitative measurement that a strategy has outlived it’s useful life ?

    • What you can do is to look at the maximum drawdown.

      If it exceeds 2 times the previous max drawdown, that’s a warning sign and you want to find out what’s the reason for it.

  • Great one… being a student to the market and risk diversification…those are gaineful to me…thanks
    But one thing im yet to figure out in trading is why i get so confused even learning a new strategy market doesn’t fully react it to why??

  • Hi Rayner, this is very insightful and will put it to work. There’s one lesson I’ve learned from you though which is working so well for me – Trend Line Trading. Read you telegram post about it this pas Sunday and my results since then have greatly improved. Thank you so much.

  • Great advices again. I started with trading 6 months ago. My equity curve still goes down but my trades get better every months. I really love trading and specially enjoy the part of constant learning. A lot of new inputs are coming from you. Thank you very much Rayner

  • I don’t know how to thank you enough, you have really helped my trading career, I’m aiming to trade for a living, I know I’ll get there by God’s grace, thank you so much Rayner, I really appreciate your effort from time to time, through your videos on YouTube, your motivational words on twitter, they have really nourished my trading, and am still learning. Thank you one again!!!

  • Hi Rayner thanks for this wonderful knowledge your advice is priceless God bless you for this knowledge sharing Thank again

  • You are more than a trader, you are a great tutor, you are really adding values to this community, how i wish i can reward you.

  • Still i am learning.i am trading only in bank nifty options.i am trying my breakout strategies.still not get enough edge to be sucessful.soon i ll find a successful trading system &strategy to suits me very well.

  • t is very precious guide for my trading carrier. I spend two weeks trying to understand the trading concept, and i was that close to give up. But your guides help me through. Thank you Rayner…

  • This is the best trading information truth i have ever come across.Thank you very much for this information. I will save and keep this lesson.

  • Thanks for this information.it is very informative and worth retaining.May the Almighty God continue to endow you with more wisdom.

  • the vast majority of people (those that didnt study economics in their life) dont know even the notion of opportunity cost.
    it never enters their thoughts
    they make decisions all their life without knowing it, THAT’S A MAJOR DRAWDOWN IN ITSELF
    and im not talking money only, because concept applies to everything

  • Hi Rayner,

    I read your article with much intrigue. Currently, I am doing my trading by selling options for income. And I really want to approach trading as a business. If I join pro trader edge, can it benefit my current trading options? Thanks in advance!!!

    • Hey Andy

      I don’t talk about options as that’s not my niche, so I’m not sure whether it’ll help you, or not.

      You use the 30-days money-back guarantee to your advantage, if it doesn’t work, just cancel and ask for a refund. cheers.

  • I am Indian market Traders and
    Equity stock trading but don’t give money so I can get knowledge and your experience so very much thanks.

  • I’m new in Trading, four Months old in the business. Why is it difficult to trade indices as compared to Forex? I always struggle to put a stop loss when Trading indices such US30CASH & as a result big losses. I noticed the same pattern when trading commodities such as Gold.

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