To achieve success as a trader, it's important to perceive trading as a business. This article delves into the concept that trading, although different from conventional businesses, requires similar planning and execution. By designing and running trading like a business, you can enhance the chances of success and reduce the risk of losses.
Expenditures in Trading Business:
- 1. Loss-Making Trades:
- The primary expenditure in the trading business is loss-making trades. Recognizing this fact helps reduce the impact of negative emotions arising from losses. Analogous to a restaurant owner understanding that some products may not always sell well, traders must comprehend that losses are part of the trading process.
- 2. Spread and Brokerage Fees:
- Spreads, per-transaction commissions, and other brokerage fees are expenses that need attention. Frequent trading can increase the costs payable to the broker.
- 3. Operational Costs:
- Operational costs include trading equipment, internet expenses, and trading software fees. Among all expenditures, risk on each trade is the one that can be managed and controlled.
Running a Profitable Trading Business:
- 1. Determining Risk Size:
- Risk is determined by the stop-loss. Traders are advised to set the risk per trade at no more than 5% of the balance or equity. This helps avoid uncontrolled losses.
- 2. Good Risk/Reward Ratio:
- Setting profit targets as multiples of the risk size helps achieve a risk/reward ratio greater than 1:1. This is key to consistent long-term profitability.
- 3. Clear Trading Plan:
- A trading plan tailored to the trading system, including entry and exit methods, entry strategies, and money management, helps reduce emotional involvement. Regular evaluation with a trading journal is also necessary to monitor performance.
- 4. Only Enter the Market Based on Signals:
- Avoiding overtrading and only entering the market based on signals helps maintain emotional involvement and minimize the risk of losses. A tested trading system is the key to avoiding impulsive decisions.
By changing the perception of trading into a business, traders can improve decision-making quality, reduce risks, and achieve long-term success. By planning and running trading like any other business, you can create a strong foundation for facing market dynamics with more confidence and measurability.