Treat Trading Like a Business

By Dan McMullin   ISSUE 210 | NOV 2003

Entire books are written about the elements that can be a part of your trading plan. And, of course, your trading plan is a pretty big detail to have in place. You'll need a guiding set of principles that defines the type of trader you are. But how do you get to that point? What is the best way of approaching this task of developing yourself as a trader?

Opening Your New Business

The answer is: “Treat trading like a business." Becoming a successful trader can be like any entrepreneurial venture; you're building from scratch a set of processes that make up a profitable enterprise. You face your own set of challenges, unique from others in your same situation. Why not tap the field of business management to provide clues about the process of developing yourself as a trader?

Imagine how you would approach the task of opening a new business. With a new business, you would be tough with your decisions - more than you would if it was just a hobby. You would research the subject, with the goal of becoming an expert in your field. You would set goals. You would overcome each obstacle in a systematic manner, moving closer each time to the day when you own a thriving business. Let's consider each of these elements a little more closely and apply them to your trading.

Measure Where You Are Now

The first recommended step in any entrepreneurial venture is to take a base-level reading of your situation. Find out where you stand now on a wide range of matters.

You can start first with a "Needs Analysis." Take inventory of yourself and your situation. This can be a simple checklist of every issue relevant to your situation. Write down and define the matters at hand, consider each carefully and expand upon each. Who knows your situation better than you?

Are you comfortable with technical analysis, and/or the fundamentals that affect your markets of interest? Do you understand the types of orders, and how best to use them under different circumstances? Which markets or styles of trading are best suited for your personality? Your checklist will help focus your energies on the most productive areas in need of attention.

You may wish also to conduct a "SWOT Analysis," which evaluates the Strengths, Weaknesses, Opportunities and Threats facing your new venture. The first two parts are more internally focused, and the last two are external.

With strengths and weaknesses, knowledge is critical. It's been said that trading is all about beating yourself, not the markets. Are you good at making tough decisions, or are you going to hesitate at the wrong times? Will drawdowns keep you awake at night, or can you detach yourself from the decision-making? Self-evaluation can be painful. Once again, resolve to treat it like another important matter of business, and you can better identify your true strengths and weaknesses.

Opportunities are more external in nature. Think strategically about the partnerships you'll pursue - about which broker(s) you'll use, what advisories you'll subscribe to, and who will provide your charts and quotes? What support groups and resources do you have at your disposal? What will be your primary sources of info, what secondary sources will you tap?

Threats are also external. What are the barriers you face to becoming an expert in your field? What problems might arise once you begin trading, and what back-ups and contingencies should be put in place to address these issues? Does under-funding threaten to derail the path you have set yourself upon? Again, the results of such an evaluation will tell you where you need to focus your efforts.

Treating trading like a business means you'll introduce some discipline and structure into the process of becoming a trader. By whatever fancy name you call it, creating and evaluating a list of issues is a good place to start.

Establish Your Goals

Once you know where you stand today, the next step is to determine where you wish to be. Establish your goals. This means determining exactly what you hope to accomplish. After all, how can you achieve something if you haven't really defined what that thing is?

With goals, it helps to get specific. How do you see yourself spending each day? Are you going to carve out a niche as an options writer, an interest rate expert or a swing-trader? How big do you wish to get? Will you some day need employees to help place orders or check your positions?

Also ask, "What do I really want for myself?" Perhaps you'll discover the commitment of time and energy is not right for you, in which case, you'll choose a more hands-off approach to investing. Or, perhaps what you crave most is the freedom and lifestyle that working for yourself in a trading business can provide. Can you live, then, with the uncertainty that being a full-time trader involves?

Businesses like to have a mission statement, which defines the purpose of the venture. Why not create your own trading mission statement? Your statement can be a few tightly worded sentences defining the purpose and ideals that dictate your endeavor. Maybe this sounds like a lot of fluff, but it supports your goal-setting efforts. When faced with a decision on which direction to take your new venture you can refer back to your trading mission statement to see how each choice fits within the bigger picture you defined for yourself.

Formulate Your Plan

After taking inventory of yourself and setting some goals, you'll need to decide how best to get from your current situation to your future business. Every good business can benefit from a "plan of action" (or a more formal "business plan"). Why should trading be any different? Commit now to getting yourself on track with a well-thought out plan.

Your plan of action will be your roadmap. It should answer the question, what steps do I need to follow to get there? Work backwards from your end goal asking yourself at each juncture, "What will need to happen before I can get to that point?" Then continue backward from there, determining what must come before that stage as well. Eventually, you'll have narrowed down your next immediate course of action, and the many steps that will need to follow.

The steps of your plan of action will depend upon what you find in the earlier evaluation process. Do you need more education, and if so, in which areas? What equipment and facilities will you need? How much will you nurture networks of other traders and chat room affiliations?

Systematically think through the stages you logically foresee for yourself. When you find an area where you don't know the answers, that's valuable information as well. Go out and gather the critical information you need.

Much of the benefit of establishing a business-like plan is found in the creation of the plan, not just in the end result. This important fact leads to the next topic.

It's a Process, Not Just a Destination

A key concept in business marketing is that of the "product life cycle." Well, traders also exhibit a life cycle, or a climb up the "learning curve." You may find it useful to think in terms of your efforts being part of a longer-term process.

Determine where on the learning curve you fit today. Are you just starting out and need to focus on basic information, or are you now focusing on fine-tuning the trading ideas you've already been using?

Know in advance that your progress will likely follow a path of rapid general progress, and then move into a more mature detail phase - and that you'll likely re-invent yourself many times in your career. With your newfound commitment to treat it like a business, such cycles will not be a cause for concern. Rather, you can see them for the opportunities they are - and as evidence of your growth as a trader.

Do What You Love

Last, but perhaps most important, is a critical element mentioned in many entrepreneurial courses. That element is passion. Every trader wants an edge. For the entrepreneur, the edge comes from the idea that you’ve chosen this direction and are doing what you love. Hopefully, this is how you will feel. Your passion to succeed in trading can be the driving force that leads you to apply that extra effort as you progress towards your goal.

Dan McMullin is a former floor trader and former brokerage firm principal. He is Director of Business Development at Lind-Waldock, A Division of Man Financial Inc.

Laura Oatney is editor of LindForum. She can be reached at editor@Lind-Waldock.com.

Futures trading involves risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources, which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading Advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

© 2003 Lind-Waldock, A Division of Man Financial Inc. All Rights Reserved. Futures Trading Involves Risk of Loss.