Trading As A Business

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Barjon

22 May, 2015

in Day Trading & Scalping and 1 more

You’re a trader, right, not a shopkeeper and there can’t possibly be any common ground between the two can there?  Just a minute, though, both are trying to make a profit from the transactions they undertake and both are concerned about their bottom line and their overall and continued  profitability. In short, both are in business.

As a trader it is quite likely that your Trading Plan will concentrate its focus on how you will approach individual trades. It will probably have quite a lot about how and when you will enter a trade, rather less about how you will guard against excessive loss and less again about how and when you will take your gains. Your bottom line probably won’t rate much of a mention at all. A Business Plan, however, will concentrate its focus on the bottom line and recognise that individual transactions are important only in respect of the contribution they must make to keep that bottom line healthy.

This article asks you to think of your trading as an overall business and demonstrates how you might gear your approach to your trades with that in mind.

So, let’s think like our shopkeeper for a moment, who might talk in this way about his Business Plan:

“I buy my widgets at £10 each and I aim to make a return on my outlay in excess of 25% to ensure healthy and continued profitability overall. I stock up with a thousand widgets each month and sell them for £20 each but, at that price, past experience tells me that I will only sell 40% of my stock. However, my supplier guarantees me £8 for those I return.”   

His monthly account looks like this:

400 @ £10 profit =   £4,000

600 @ £2   loss =  - £1,200

Net profit  =   £2,800  = 28% return on initial £10,000 outlay.

I’m sure you will have noted that restricting his losses on the widgets he can’t sell is absolutely crucial to that result.

But you’re not a shopkeeper, you’re a trader, so let’s now think like one and describe your business in trading terms:

“I aim to grow my trading account of £10,000 by 20% overall year on year. I am not prepared to lose more than £200 on any trade and look to gain at least £350 from those that are successful. With these criteria, I know from past experience that only 40% of my trades are likely to be successful. I make 100 trades each year.”

Your yearly account looks like this:

40   @  £ 350  profit =    £14,000 

60   @  £ 200  loss   = -  £12,000

Net profit  =   £2,000 = 20% return on initial £10,000 account.

That’s nice and easy, then, we’ll all be millionaires in no time. Unfortunately, as we all know, it’s quite the reverse of easy and it’s all very well to describe your business like that but, in truth, it is more a statement of intent to work with rather than one that contains much certainty in practice. It does, however, mean that you might approach your trading in a slightly different way and I’ll move on to that now.

The elements of a trade
The three important questions to consider when you are planning a trade are:

entry - when and where will I buy/sell
                 risk - how much will I lose if it goes wrong
                                exit - when and where will I sell/buy to realise gains

It’s quite likely, particularly if you are inexperienced, that you will consider those questions in that order and in that order of importance. From a business perspective it’s slightly different.

When a potential trade entry beckons the first thing you must look at is your risk because this is the only thing you can be certain about from the outset, barring isolated disaster events. You are in control of it and it is essential to your business that you exercise that control unfailingly. Your control comes from a combination of stop loss exit and position size (see later). You will remember from our shopkeeper that limiting his losses was the crucial factor in his overall profitability.

Secondly, you must look to your exit in respect of where you will realise your gains. For this you will set a target level. You cannot be in anyway certain that price will reach this target, of course, but you can make a reasonable assumption based on your experience of the particular strategy or method that you use.

Lastly, you turn back to your entry because it is only when you have considered your risk (certain) and your exit target (potential only) that you are in a position to judge whether a trade at the entry level you have in mind is a worthwhile proposition or not.

To sum this up here is an example of how a trader might look at a potential trade.

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foroom lluzers;2923356


".....
If you can now give a set and forget version of your trading beliefs , it will block the arousal of most psychological demons .I am having a constructive view on it.I would love to apply your beliefs in the article , to set and forget strategies........



The main problem is taking the stoploss. If you haven't got the discipline it's not easy to take a loss if the trade goes against you if you "just have it in mind" where to take it. Easy enough, just set the stoploss order before you enter the trade. If you haven't the discipline not to tinker with it as price gets near then do the "walk away and forget" bit.

You would, of course, sacrifice any chance of lesser loss (or gain before target is reached if you've put in an order for that) with discretionary action.

Jun 24, 2017

Member (9572 posts)

barjon;2922830
Because, as you say, the enemy is between the ears which causes people to ignore or bend their rules. Particularly letting small losses become big ones and undoing the gains of many earlier trades.

You often advocate a set and forget type approach and I'd go along with that and setting orders if one does not have the discipline. You do lose every "discretionary" type consideration in your approach of course.


This type of trading ,as suggested in your article , is playing into the hands of all psychological demons within us .These are stress responses and reactive patterns,emotions (revenge trades ,frustration over trading ,fear ,greed), need to be right , automatic subconscious trading mind ,confidence , state of mind , beliefs , cognitive biases , loss aversion (trading your bottom line) and others.

Your beliefs in the article ,as to how to think about trading , should really be defensive , it would lead to blocking all the loopholes to failure.As an example prepare for
1)what if t/a set up fails (it is easy to say take a loss but hard for a trader to do).
2)Failure of market timing
3)failure of trend breakouts
4)failure of self discipline

Most traders are not prepared for the above failures .This is where IMHO it goes wrong for most.

If you can now give a set and forget version of your trading beliefs , it will block the arousal of most psychological demons .I am having a constructive view on it.I would love to apply your beliefs in the article , to set and forget strategies.

A simple example of such strategy is :buy a weekly call option on the Dax every Monday at 9 a m , after a lower close in previous week.Do nothing for the rest of the week. It can be profitable , easy trading and it can block the demons.

Jun 24, 2017

Member (3626 posts)

foroom lluzers;2922780
It is a well written theoretical scenario , if only traders could be disciplined and follow it .

I would also agree and disagree with the following"Failure to properly control your losses is the main reason why so many are unsuccessful at their trading and why so much is written about its importance".While failure to control losses is the outcome , the underlying drivers to losses , it is the enemy within that leads traders to failure , the enemy is the 12 inches between the ears.It is the psyche and how our ancestral brain is wired to misbehave in the markets.If it was that easy to follow your article ,trading is simple and easy ,why are so many unable to do it?


Because, as you say, the enemy is between the ears which causes people to ignore or bend their rules. Particularly letting small losses become big ones and undoing the gains of many earlier trades.

You often advocate a set and forget type approach and I'd go along with that and setting orders if one does not have the discipline. You do lose every "discretionary" type consideration in your approach of course.

Jun 23, 2017

Member (9572 posts)

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