Trading as a business: 9 things you should know
Trading is a business and all successful traders think so. Of course, it is difficult to accept yourself as a businessman when you sit in front of your computer and press buttons in the comfortable home environment. If you do not consider trading as a business you shouldn’t invest money in it. On the other hand, you can make trading in the financial markets your hobby but it is not the best idea. You will not be able to achieve a long-term success in view of the absence of the professional business approach.
If you agree that trading is really a business, think about the following. Approximately 80% of new companies continue to function after the first year of operation. It is impressive but only 50% of them stay afloat after 5 years of operation and only 30% continue to operate after 10 years of doing business. Statistics says that 85% of traders fail in trading. You will learn from this article what financial market trading approach you should keep to in order to be among successful traders.
In this article:
- What makes you a trader?
- Trading might not produce results as well as any other business.
- People go in for trading by error.
- Insufficient capital doesn’t allow business to grow.
- Absence of required competences.
- Delusive dreams have nothing to do with reality.
- Absence of a business development plan.
- Error of ignoring the general picture.
- There are no strict rules of making business.
What makes you a trader?
Does opening a trading account make you a trader? Do you become a trader when you acquire a trading platform license? Any person can open a trading account and press buttons for opening or closing trades in the financial market. But does it make you a trader?
It is difficult to accept that any person who opens a trade in the financial market is a real trader. In our opinion, a professional trader is a person who:
- tests a trading strategy and develops a trading plan;
- regularly analyzes efficiency of his trading and makes necessary changes in it;
- avoids emotional trading and knows a set of what qualities is required for trading in the financial markets.
Of course, this is not the ultimate list of components of a real trader, however it narrows down the circle of those who have better chances to achieve a long-term success in trading.
Trading might not produce results as well as any other business
It is rather difficult to list all components of a successful trader, that is why we will consider trading as any other business. According to the Global Entrepreneurship Report published by the Babson College from the Greater Boston more than half of commercial companies that ceased to exist did it on the grounds of two main reasons:
- absence of profit;
- lack of financial resources.
These two problems are also widely spread in the sphere of trading since the majority of traders fail to make money in the financial markets and they constantly replenish their trading accounts from their financial resources. Let’s consider more deeply the reasons why companies fail and let it be a warning for those who invest their money in trading.
People go in for trading by error
If you want to make big money, have more free time or just stop working for someone else, there is a chance that you will be sadly disappointed very soon. The primary passionate attitude to trading in the financial markets will be very useful for overcoming obstacles and problems that appear at the beginning of your way to success. In order to understand whether you really feel passion for trading, you should be well acquainted with the world of trading and mechanics of the financial market operation. Of course, a strive for fast money might be called a passion, however, it will not help you to cope with the inevitable losses and stresses.
Insufficient capital doesn’t allow business to grow
If your circulating capital is not sufficient for covering current expenditures and compensating financial losses during the period of the business establishment, you will never achieve its stable operation. Inflated expectations of the business profitability are also widely spread among beginner businessmen.
You shouldn’t forget about living expenses. If you refuse a small but constant income, the housing and electrical bills will not stop appearing in your postbox. That is why you should take into consideration the size of your current expenditures and take them into account when you plan your profit. You will have to use the profit made in the financial markets for covering your current expenditures which could exhaust your trading account especially when you experience a series of loss-making trades. Apart from everything else, such a life situation, most probably, will push you to opening trades under unfavourable market conditions, which would result in accumulation of losses and, consequently, a larger stress.
Absence of required competences
What do you think about how much time a person needs to learn how to apply the accumulated experience in one or another sphere of business? Those who have to prove themselves would face a difficult task. Let us ask you another question. Would you have invested your funds into a startup managed by a person who doesn’t have proper skills or who has a small experience of work in a specific sphere? Most probably the answer will be ‘no’.
The ‘skills’ aspect is a real problem in trading. If you manage to find a really efficient trading strategy you belong to a lucky minority. Quite often efficiency of strategies is short-term and the general trading theory, which is discussed in forums and free electronic newsletters, represents, as a rule, repeated old trading techniques which are quite inefficient in the current epoch of algorithmic trading.
Delusive dreams have nothing to do with reality
When you come across one or another potential business opportunity, it is far from certain that your current vision of it, your product or business idea are really required for achieving success. Time is required for your study and assessment of the potential market and getting a clearer picture. Your understanding of the current situation will be changing and becoming more complete in the course of accumulation of experience.
Initially, traders consider the intraday trading as a way to become rich. In the course of time many of them understand that they do not have a sufficient potential for intraday trading and start using a different approach to trading.
Absence of a business development plan
Your business will be doomed to failure from the very beginning without a proper business plan, since you will not have clear goals and, consequently, a method of objective assessment of the level of efficiency of making business or trading in the financial market. A plan is absolutely useless in the absence of the procedure of the audit of measurements and indicators of efficiency. It will be even more difficult to introduce necessary changes if you do not have a possibility to look at the gained experience and to objectively assess the efficiency of your plan, degree of its realization and the market you trade in. Your business will not be able to pay proper attention to the products or services, which have the paramount importance in its development, without a business plan. As a result, the capital and time which you have at your disposal will not be used efficiently and your resources will not be properly used.
A trading plan, in which all necessary parameters for making trading decisions are stated, is a must for trading. A deep analysis of the profit- and loss-making trades, assessment of weaknesses and strengthening of strengths are impossible without it. Moreover, you should identify what type of traders you belong to as early as at the stage of preparation. You should identify whether you are an intraday or a middle-term trader or represent a combination of these two types. If you take into account all these parameters and fix them in your trading plan, it will allow you to set your trading in the right direction and ensure its systemic character.
Error of ignoring the general picture
We should admit that sometimes trading seems to be an easy business. You start feeling that you can do anything at such moments because the market just moves in your direction and you do not want to be distracted by other variants of its further development. However, the business and life reality is such that nothing lasts forever. For example, the following changes may occur in the course of business development:
- changes in the regulatory and legal framework;
- changes in the business environment conditions;
- changes in the customer habits.
For a business to survive it is important to understand what may happen before it becomes a potential reality. Your business will fail if you do not take into account the changes that take place.
Any business rarely changes overnight but if you want to stay in it for a long time, you have to monitor the general picture, at least, generally. The same is with traders. If you do not understand the context of a wider picture of the market, a change of a long-term trend can surprise you a lot.
There are no strict rules of making business
Rules usually become a part of a trading plan in trading. Any business should set own rules in order to protect its future. The problem is that the rules could be both protection against the worst scenario and obstacle on the way of the best scenario of business development. That is why you will probably have to adapt the rules in accordance with the general picture.
If something works now, it may stop working in the future. Imagine a strong uptrend, at which you constantly bought out the bottom and didn’t set rules that should have told you when you need to stop buying. In this event, you will go against the stream and accumulate losses, losing the earlier made profit, when the global trend changes.
When someone who has already achieved success in business launches a new business, setting the rules for its making is not easy at all. Successful development in an environment where rules already exist is very different from an environment where you set your own rules. The ability to set efficient rules and observe them has a significant impact on the success or failure of any business.
The aspects, described in this article, will not become a revelation for professional traders. Nevertheless, this material will put the novices on guard against hasty actions and help them to look at the trading and assess their forces more judiciously. Despite the fact that the above described aspects are quite evident, the majority of people overlook them when they come to the financial market. Develop high responsibility towards trading in yourself – apply a professional approach from the very beginning of your trading career.