Not many people approach stock trading as an ordinary activity. Of course, they want to make money, and fast. But you rarely see the budding trader planning his trading activity as he would any other brick and mortar startup. Maybe that’s why there are so many victims in this industry, because very few treat day trading as serious business.
This is no surprise. There are a plethora of advertisements on the Internet that offer get-rich-quick opportunities in the market.
Gurus and furus offer their services at nominal cost and promise millions, just like their best students did. Heck, they even show you their brokerage statements to prove it!
But is it that simple? And what structure do these services provide you? Do they teach you how difficult the path to success will be? Do they tell you how many students dropped out of their programs because of failure?
Better yet, do they provide a framework and framework on how to plan your career, just like you would with a company?
Day trading without a real business plan is very similar to gambling. Tell yourself, I will throw my savings on the wisdom of these internet gurus and hope for the best. A year later, you’ve probably coughed up half of your savings, if you’re lucky to have more.
We just hope you kept a side concert in the process.
This is the situation of many aspiring entrepreneurs in the world of commerce, unfortunately. So, in this post, we’ll explain how treacherous the path can be and give you a better structure to kick-start your trading activity.
WHAT IS A TRADING ACTIVITY?
A trading activity is like any other asset. You can decide to incorporate or act as a sole owner. Regardless, starting a day trading business is very simple. All you need is to apply with a brokerage and load money into your trading account. Because of this, it can be a dangerous activity to start, with such a low barrier to entry.
Just like any other effort, you will be required to pay taxes on your profits. However, there are some limitations to tax rules for day trading that you should be aware of. We’ll touch on them in a moment, but suffice it to say that, like other companies, you’ll need to be aware of what cancellations may apply to your business along with the short- and long-term capital gains you’ll be responsible for.
Unlike a brick and mortar business, you don’t need anything other than a computer or mobile device to start a business. You won’t get the expense of restaurant equipment, medical malpractice insurance, or employee management headaches. Nowadays you can place a stock order with iPhone apps or more advanced trading software on computers. This and an internet connection are all you need to get started. Literally.
But just like buying stoves and ovens, tables and chairs and having the best recipes in the world will not guarantee a successful restaurant business, so having the best computer, broker or guru will not guarantee you will make money on the market.
WHY DO YOU NEED A BUSINESS PLAN?
One of the most overlooked, but most important parts of a successful trading business, is the business trading plan. Why do you need a trading business plan? For a handful of reasons:
- It will force you to research your business and probability of success.
- A trading business plan will help you stay grounded with realistic expectations.
- During difficult times, it will guide you to re-evaluate your process.
WHAT ARE THE 6 ELEMENTS OF A GOOD TRADING BUSINESS PLAN?
Every business needs a business plan. Usually, you will have an executive summary, a description of your team, products/services, market prospects, financials, etc. But for trading, the variables are a bit different. Your team is really just you, with a few exceptions. Your product is your business plan and your financials are just your available capital.
Let’s take a deeper look at each of the 6 elements of a good trading business plan:
1. Your business purpose
We are big supporters of targeted trading. The “why” of everyone will be different, but it is important to atone for it. It doesn’t have to be for anyone but you. That said, the more you think about why you want to trade, the more it should motivate you to succeed.
Every entrepreneur has a reason or purpose for what they do. It could be as simple as “making more money?” Sure. But we encourage you to dig a little deeper and find more than that. Here are some examples of why you might want to start a trading business:
- Working for yourself
- Increasing wealth
- Learn a new skill
- Spend more time at home
- Be available for your family and friends
- Have the ability to give more
- Pay debts
There are many reasons why people trade. Spend some time thinking about why you want to start a day trading business and write it down, reflect and explain it. The more concrete your reasons become, the more tangible your efforts to achieve success will be.
Think of them as results. Of course, profitability is the ultimate goal. But what does profitability offer you? Hour? Love? Charity? This should be the beginning of your business trading plan.
2. Your trading process/system
Would you open a new restaurant without a menu? How about a proven recipe? Would you run to the supermarket every day and cook what you felt that night? Absolutely not.
Restaurants work well if they scale very systematically. It all starts with the layout of the kitchen. The grill is on one side, the sauté in the center and food preparation, washing and storage in another area. Depending on how much you like it, you will have a preparation of salad, dessert, coffee area, etc.
It’s all designed to flow in a cyclical rhythm to keep things running smoothly.
The menu also changes very rarely in restaurants, unless the chef adds a special here or there. And recipes are often kept secrets that never change. Perhaps seasonal offerings will vary, but restaurant staples are usually known and predictable.
So should your trading system be.
In your business trading plan, you need to define not only the strategies you will use, but in what type of market those strategies will perform well. Do you get seasonal allegory there?
You see, trading the markets is very similar to other companies in that the more systematic you are, the more consistent you will be and the more your customers (your profits) will want to come back to dine with you.
Hanging around with too many recipes (strategies) at once, you come to the market disheveled, unorganized and unprepared, and you will end up with a kitchen in chaos, customers coming out the door and your profits disappear. It must be a well-oiled machine.
To avoid chaos, this section of your trading business plan should involve a Trade Book. We’ll discuss your business book in more depth below.
3. What risks/costs are involved in a day trading activity
Starting a new business is risky. There’s no way around it. If you want to get ahead in life, you will have to risk something: money, time, failures, other opportunities.
Human beings crave security. But trading markets do not provide it. It provides uncertainty.
might think that if you make a million dollars on the stock exchange, you’ll have security. And this may be true. However, the odds of success are not in your favor. And as a general rule, the market is a game of uncertainty within it.
To win, you must learn the science of probability and the need to overcome your human emotions. Pair that with an artistic sense of insight and discretion, along with favorable market conditions, and you may succeed. As part of that, outlining what risks and costs are involved in your day trading business would be a good place to start.
We recommend that you consider the following when calculating your risk/costs
- Computer and other hardware costs
- Software fees, charting tools, scanning software, etc.
- Brokerage fees: commissions, short localization fees, ECN fees, etc.
- Educational courses, books and materials
- Chatroom/mentorship subscriptions or service fees
- Maximum withdrawals in your account
- Hours associated with being in the market (9.30 – 16:00 EST)
- Extra time spent reviewing, studying and analyzing
- Capital reinvestment
- Funds to top up your account
- The time frame required for profitability (most traders, like businesses, take 2-4 years).
These are just some of the costs and risks associated with trading. If you end up with a catastrophic loss, what impact will your business trading plan have?
While there are many free resources available for traders, we would join to say that most traders will spend many thousands of dollars just to learn how to trade, let alone how much they lose in the markets.
Obviously, we are big advocates of learning how to trade safely – in a simulator. Unfortunately, most new traders like to learn the hard way. Whichever route you go, we encourage you to keep your costs and risks under control. Outline them and budget for these items long before you pull the trigger on your trading activity.
4. How much initial capital do you need for your trading activity?
Before answering this question, we cannot stress enough how important it is to PROVE before you can trade consistently in a simulator for many, many months. Funding your trading account is not the first thing you need to think about.
Spending time in a simulator is the first thing you need to think about. Point. Take the time to test and test your results in our analysis here at TradingSim. You can trade the market for the past 3 years at any time, testing your strategies.
Once you are successful and consistent, then think about funding your account.
Well, now that we’ve got it out of the way, let’s talk about funding your account.
WHAT IS THE RULE OF PATTERN DAY TRADING (PDT)?
Assessing how much money you need to get started depends largely on your financial position. The Pattern Day Trading rule was enacted shortly after the bull run of 1999-2000. Limit the number of daily trades you can make within a 5-day period to just 3, i.e. if your account is less than $25,000.
This is something to consider when funding your account. If you plan day trading, starting above $25,000 might be wise. That said, we’re big advocates of proving to yourself what you can do in the marketplace before adding to your account.
We have already written about the PDT rule and ways to get around it. There are options such as offshore brokerage accounts, opening multiple US-based cash brokerage accounts, etc. We don’t dive here, but if you’re not familiar with these options, be sure to check them out.
As a general rule, start small. Start small enough that your account can grow without the headache of forced errors due to having a small and limited account. But not big enough that it will cost you dearly if you make rookie mistakes.
And trust us. You will make beginner mistakes. A lot of them.
GENERATE INCOME DURING YOUR FIRST DAYS OF TRADING
For your business trading plan, be sure to outline what you will do for income. Most traders take many years to achieve consistency in the markets. And for consistency, we mean being able to not only make a living, but also continue funding your trading account.
To do this, take stress off your shoulders by trading part-time until certain goals are reached. Or, if you decide to go full-time, be sure to outline your expenses and the amount of savings you’ll need to put aside for 1-3 years of ups and downs in the market.
In addition, you owe your own contingency plan. Define in advance what you will need to do if certain milestones are not reached.
Finally, discuss this with your partner. There’s nothing worse than jeopardizing your family’s responsibilities because of an extravagant and poorly planned business. As the saying goes, err on the side of caution. Imagine the worst, then double it, then add a little more at the top.
This is the kind of “risk” cushion you need for your trading activity.
5. Define your trading team
Every good company has a good team. Whether it’s a board of directors, consultants, or a management team, the best companies have good leadership. Organize your trading activity in the same way.
Of course, your trading activity will not be structured in the same way as your normal activity. You are solely responsible for clicking the buy and sell button on the market. However, there are people you can add to your team to help you along the way.
HOW TO FIND A GOOD MENTOR FOR TRADING
Finding a good mentor in stock trading is easier to find nowadays. There are many mentorship services available online. Not everyone is created equal, though.
When you’re looking for an educational service or mentoring, you’ll want to take your time. Think of it as shopping by car. The best car buyers do their online research first, narrow down what they want in a car: brand, price, color, miles, trim level, etc. Then, it’s about going to the dealership to try driving, ask questions, etc.
Just like a dealership, you’ll find a hungry salesperson who wants to “don’t do business with you today!” But you need to be on your guard. It’s your money, your experience, and ultimately, your decision. Stand up and always take everything with a grain of salt.
Look at online reviews like TrustPilot. Ask around on Twitter. Look under the hood with the “test” memberships. You really do your due diligence. Yet, you understand that no tutoring or educational service will be perfect.
In fact, you should enter every educational service expecting to learn something new from as many mentors as possible. This way, you will learn that your greatest asset is being your own trading coach.
bring this full circle to your trading business plan, do your research first. Outline the 10 best trading educators you can find. Exhaust yourself with effort, then narrow down your results to the top 5. Start there and give yourself time to work on your list.
In your trading business plan, identify which services you will try and which ones you could avoid.
Also, include non-commercial mentors in your business plan. Perhaps your spouse, close business friend, or confidant can provide a new perspective. And one of the best ways to find a team is to gather business friends along the way. All these educational services have tons of people just like you. Reach out to them and try to connect!
We would also be remiss not to recommend a good psychology coach. We are big fans of Dr. Brett Steenbarger and his books. Do not go without them.
6. How to grow your trading business
This section of your trading business plan may not fully materialize until you are well on your way to consistency in trading. You see, the path to trading success looks like this:
- Lose a lot
- Losing less
- Breaking the tie
- Do a little
- Profit more
- Earn a lot of money
You won’t really know how to make a lot of money unless you find a scalable system. In fact, many millionaire traders find themselves in a place in their career where they have to adjust their strategies because their accounts have become too large for the strategies they used when their accounts were smaller.
While this isn’t something you should worry too much about early in your career, it should be on your mind.
Typical businesses require some form of marketing to grow, right? Not only that, but they need a scalable system. You build a successful restaurant, systematize its operation, then you can turn it into a franchise. Voilá!
Trading is very similar. The market is all about aggravating your profits. When you find a scalable trading system, you’ll want to take the time to cultivate it. This requires the right strategy, the right risk management, the right experience, and the emotional ability to trust your system despite the larger swings in the account up and down.
Keep this section of your business trading plan open. Add it as you evolve as a trader and your strategies evolve. Conduct research on what the major players in the market do to aggravate their big earnings.