People talk about trading as a business all the time as if it is a golden rule to trading success. The truth, as usual, is far from it. This dilemma I learned many years ago from someone who took his trading very seriously and planned one day in becoming a professional day trader. That day never came.
Trading As A Business Can Mean Anything You Think It Is
A cliché lacking substance often leads to wide range of interpretations. Trading as a business is exactly one of those statements. What type of business we are talking about that you need to model your trading career after? Vaguely speaking, every activity under the sun that has the goal of making money is a business. So the big statement everyone is talking about is no more than saying trading as an activity that makes money. That is not only silly. It is meaningless.
Take the example of this gentleman at his early 30s when I met him years ago. His background is in engineering. He has a good paying job and has been building his nest egg for a while. He set his eyes on the idea of becoming a professional day trader. He has read pretty much every book he can get his hands onto and spent a long time writing out a trading plan in great detail.
The problem, however, was that his idea of trading as a business is modeled after a corporation, a very government like corporation. His trading plan put all the emphasis on the quality of his data, the brokerage reputations and things not related to trading at all. Some of those things are important like how safe the brokerage is. But he never pays any attention to the most important part of the plan – in his own terms, revenue generation.
Why?
He is an engineer who spent most of his adulthood from maintaining the products sold, to designing more efficient products. His idea of making money is that if he does his work, he is expected to be paid. The companies he work for are all well established companies. Whenever they introduce new products, he sees sales. He has no idea how running a business of his own is like.
He is completely disconnected from reality because of lifetime experience as a salary man.
So What Kind of Business Trading Is Really Similar To?
For an absolute beginner going into retail trading, think of yourself running a lemonade stand or a hawker selling bottle water at a tourist hotspot. Think of what is really required to make money from running a business like that. Go through the mental exercise thoroughly. In case you cannot think of anything concrete, read some children books on the subject. For those who has never run your own businesses, the words “trading as a business” has no meaning to you. Learning about the most basic form of running a business can help you practice the mental process necessary to think like an entrepreneur.
What makes these businesses most similar to trading is that you must have the right product or service, at the right place and at the right time in order to be profitable. You do not need to sell many kinds of drinks to get started. What you need is just one item that, given enough traffic, will provide you with enough potential customers to make money. That is the core spirit of trading – you have one trading setup that you know very well which happens on a particular market enough number of times that you can profit from it consistently.
There is absolutely no meaning whatsoever to focus on whether you are going to sell lemonade or bottled water. As an entrepreneur, you have to be completely detached from the products themselves. Your goal is to make money. Whichever one that can be incorporated into your plan with better expectancy will be the one you go with. Objective analysis matters, your own opinions not.
Running a Small Business Is Emotionally Challenging
This is the part where majority of people fails as an entrepreneur or trader. Their emotional attachment to the roller coaster rides in running the business ruin their focus in the core spirit of running a business – to make money. No wonder why 90% of small businesses and traders lose money and fail in the first year.
Some people are better with managing more complex businesses but majority of people are not. At least not without some training first. Hence, aspiring traders who keep on dreaming big but lost focus on what matter most at the moment, being proficient with one trading setup at one market consistently, would not succeed with their pursuit of making money from trading.
Without the proper positive reinforcement from the experience of running a simple business, in the case of trading being able to consistently trading one single setup consistently, the person will almost always develop problems down the road because they do not have a solid mental anchor in their mind how to handle the probabilistic nature of trading.
Mental strength is easier trained from controlled environment. Pinning yourself into full scale reality challenge means you are putting yourself in a unfavourable position that is prone to fail. Yet, people want to learn everything as quickly as they can so that they will be able to grab all the trading opportunities. Unluckily, they are more likely taking all the opportunities to part with their money as quickly as they can.
Unlike a Lemonade Stand, Trading is Scalable
Unlike running a real lemonade stand, trading is very scalable.
For someone running a lemonade stand who wants to expand the business, it will have to be transformed into a different type of business just to make a bit more money thanks to government regulations and other physical constraints like storage spaces for all the lemonade inventory.
For retail trading, however, 10 times or even 100 times the profitability is just a matter of trading a larger size given consistency is already achieved. The physical aspect of scaling the operation is not necessary until you are hitting the regulatory limits.
This means the classic thinking on how to growth your business does not apply to independent traders at all. As oppose to keep finding more and more trading techniques to get you engaged with the markets all the time, it is better to build on just a few very consistent trading setups and scale from there. It sounds simple but very difficult to do in reality because no one has the patience for the slow and steady growth.
Wrong Mental Picture About Professional Traders
This poses an interesting issue that many beginners failed to realize.
It is not how good you are at interpreting the market majority of the time that determine if you are a consistently profitable trader. It does not matter that you are wrong 90% of the time with your opinions about the market. It could be because of your personal beliefs that make you very opinionated or emotional most of the time. As long as you do not act on your opinions, your bottom line is not affected.
All it takes, is within a very short time window during the day when one of your few selected trading setups showing up and you immediately handle it mechanically and dispassionately. Once the trades are over, you can go back to your normal self. Not every one is born with nerve of steel and the endurance of high mental concentration all day long. That is not a practical advice to majority of people. The practical approach is learning to enter the mental state for trading execution when it is necessary.
All the aspiring traders should know about this little secret – majority of consistently profitable traders are just like that.
Hence, the typical beliefs people projected about professional trader are completely wrong. People often thinking of those big macro fund managers who appear on TV and have biographies about them are the stereotypical traders. Normal people think that professional traders know what they are talking about and that the opinions coming from these individuals are good analysis of the markets. These assumptions are dead wrong.
First and foremost, these people are not independent traders. Strictly speaking, those people are not even traders anymore even if they may have made their money initially being one. They are fund managers running funds. Their present opinions and how they carry themselves now have nothing to do with their past trading successes.
Trading as a Business Is Not About the Business After All
As a summary, for independent traders, trading is not about the business. Better business practices can help your bottom line only if you can generate revenue. The very thing that generate revenue for your trading business is you. You are the product that your trading business is depending on to make money.
Majority of people are in no shape or form to trade. The mechanics of order placements and other essentials are just necessities. They are not the reasons why you can make money consistently from trading. It is how you engage the market from the ground up, both psychologically and intellectually, that determine if you have a chance to succeed at all. More time you are willing to build a strong foundation on both, the better the end results will be.
The engineer I mentioned earlier, attempted to day trade several times and eventually gave up some years ago. He still blames the others like me for not showing him the secrets though. He also regrets that he ever tried to day trade because it is obviously rigged and that he could have saved up enough money for retirement already if he had not been lured to throw his money away. Talking about gambler’s remorse … it is the fault of everyone else except himself!
Part of the Essence of Trading series
