Tips On Planning Your Trading Business; Basics You Should Know.
Do you have a business plan for your trading activities? Do you know how you will structure your business to achieve your trading goals? This article will touch on some important elements to consider when developing a business plan for your trading activities.
As defined by Wikipedia, “A business plan is a formal statement of business goals, reasons they are attainable, and plans for reaching them. It may also contain background information about the organization or team attempting to reach those goals.”
The first step on the road to good planning is to have a solid sense of WHY you are trading. Some may think this is a foolish question; doesn't everyone trade to make money? The answer to that question can be either yes or no; there are many traders who do not have a clear picture of their goals as a trader. If you are just beginning as a trader, your goal at the outset is to learn your trading platform, study strategies that fit within your available trading capital, practice good execution (order entry and exit), and risk management. You will want to find your “comfort zone”.
Perhaps you are not happy with your returns on “conventional” types of investments, i.e. interest earned on a savings account or certificate of deposit. To improve these returns, you may choose to allocate a portion of your savings account to your trading account and utilize those allocated funds to improve your annual yields. Using some of your savings account will probably mean that you are more prone to very keen risk management, as you do not want to put your hard-earned savings at unnecessary risk. Trading in this context is diversifying your capital and part of your overall goal in your business plan.
If you are trading full time for income, then you are most definitely in the role where trading is your business. Any retail business owner needs to know how they will make money…what their product costs are, and at what price they need to sell those products for, to make a profit on their investment.
Some of the questions to consider in your trading business as you develop a business plan may include:
- What vehicle will you trade, and what strategy will you implement? Your back testing and live trading results will help you determine this.
- What are your expenses? This includes software, computer equipment, commissions, and any other expenses related to trading full time. It's important not to omit any overhead items, such as data costs, internet connections and backup, as well as educational materials and possible travel to trading-related seminars. Please check with your tax advisor as to what expenses may be tax-deductible.
- What is your expected return per trade? Per month, or per year? What is the likely fluctuation in returns due to the inherent losses a trader must incur at times? Is this fluctuation manageable to cover all your expenses?
All of the above questions mandate accurate data based on real-time experience, not what you “want” or hope for in your trading business. Before any attempt to trade full time for income, you will want to have enough experience to be able to put together a solid business plan.
It can be surprising how some traders really do not completely understand how to make money on a consistent basis. By not having a clear understanding and a solid business plan, they are not well-equipped to distinguish drawdowns that are normal in any trading business from a potential problem that will affect the overall business plan. Trading as a business requires a solid plan, which can better equip you to weather the storms encountered by shifting market trends and volatility.
If you are building your business plan and need help identifying a vehicle or strategy that works for your trading style and experience level, there are many educational programs offered at http://www.capitaldiscussions.com that will help you be on your way to success.
If you have additional thoughts on how to approach developing a business plan for your trading business, feel free to comment below.