When we first started Business Of Finance, it was Our Mission to help traders get better in trading, amongst others. Trading isn't a novelty in and by itself, but when viewed and treated as a Business, it becomes clear why so many fail at it. Most traders (we're using the term loosely here) have and will probably never see trading in this light. We strongly believe that being a successful trader is founded on 20% technical skills, and 80% on mentality and psychology.
An overwhelming majority place most if not all their eggs (time and effort) on sharpening that 20%, hoping to edge out millions of others in the game of survival of the fittest. While there is no wrong in striving for better technical abilities, focusing too hard on something that plays a relatively minute role in the context of running a business is the first step in the wrong direction.
Apart from not practicing sound money and risk management, not developing an iron psyche and healthy rudimentary routines, one other thing many fail to do is to treat trading as a business. What makes trading different from say running a dentistry? If you think hard about it, there are many times more similarities than differences between the two seemingly different professions.
Both demand individuals to have substantial level of specific technical abilities; a trader needs to know how to properly read and analyze price and data, while a dentist needs to understand the anatomy of the human jaw and positioning of each tooth (please excuse us because we aren't dentists!). Both professions require a certain amount of self-confidence to properly execute their tasks - Traders that lack self-confidence often find themselves in a state of escalating crisis, while dentists risk screwing their patients up if they flip flop. In short, both professions have soft and hard skills as prerequisites for individuals to even get started.
Running A Business
There's something missing still. Take a step back and look at the broader picture. Is running a dentistry all about operating on peoples' mouths? Is trading all about looking and analyzing price charts? Is running a hair saloon all about applying the best and trendiest styles on clients? Is trading all about correctly interpreting fundamentals and data inputs? Is running a restaurant all about cooking up the best foods? Is trading all about knowing which positions to have in your portfolio at a given time?
No, no, and no. It's about everything put together, it's focusing on everything and knowing exactly what you have to do to successful operate and manage a business. Each kind of business demand a specific set of skills, and a timbre of mental state. However, all business owners understand that it isn't about an individual part, but the sum of all parts. No cliché here!
From our knowledge, about 8 in 10 businesses fail somewhere in their lifespans. We speak to many entrepreneurs ourselves, so we know what it is like to be a successful one. And no, it isn't easy. Statistics show that over 90% of traders loose money. In any for-profit business, the measurable objective of success is often how much profits you make. It's even more straightforward in the business of trading - the only material reason why people trade is because they want to profit. Note that we aren't saying that profitability is the only reason; that's because trading brings a wealth of other intangible benefits besides monetary gain (assuming you make money), benefits that professional traders find good solace in.
The success rate in the business of trading is even lower than for most businesses in general. In fact, being a professional retail trader is perhaps on of the hardest professions you can be in. It's worth repeating, 9 in 10 traders loose money. Here's one of the more catchy ones we've heard so far: "90% of traders loose 90% of their money in 90 days". Pretty accurate if you actually did a controlled study.
That "extra" deficit of 10%+ can probably be attributed the mistake of not treating trading as a business from the start. Irregardless, it takes a lot more than a laser beam to light up a dark street. You'll need a floodlight with a full spectrum of visible light, just like in any successful business. Managing operations, selecting the right people for your team and managing them well, knowing when to expand and when to play it conservative, and so on.
The logistical part of trading is most often overlooked as being unimportant, irrelevant. This cannot be further from the truth. Let's just take running a restaurant as an example. In order to be marginally successful, you'll probably need:
- A good team of chefs that are proficient with their kitchen skills, honest, and committed to cooking for a living;
- A good team of support and service staff in the dining hall and behind the curtains to help you run the show well;
- Solid managerial skills between you and your colleagues and team members, your ability to manage people well is paramount;
- A certain level of trust between you and your staff for them to be able to function they way they should, like allowing your chefs to express their passion for food in their dishes;
- Quality and fresh ingredients for the preparation of what's on your menu, good relationships with suppliers to ensure minimal disruptions to your supply chain;
- Proper financial accounting to keep track of business expenses, cash flows, indebtedness, and so on;
- Proper cost management, compensation structure for your staff, incentives and so on to retain talent;
- Good public relations and marketing to get your word our, you may even need a team specifically for this purpose;
- A suitable location with optimal human traffic and ambiance for your restaurant;
- Appropriate decor and layout for diners to feel comfortable, and to express your vision;
- Proper certifications on general hygiene to meet regulatory standards and requirements (a necessary in most developed countries)
As you can already see, even running a relatively straightforward business in the F&B industry takes so much more than just preparing delicious food. If you're unprepared or unaware of all these, get ready to step into hell on earth the moment you make the decision to start a business.
It's similar for the business of trading. There are hundreds of aspects you'll gradually need to settle once you've gained your natural cadence. Understand that trading is indeed a business, and like any other business, the effort you put into your it will have a direct correlation to what you get out of it. No black magic here.
Here are some of the basic questions you should answer to yourself: How do you prepare for each trading day? How is your general state of health and physical fitness. Is your mind sharp and primed for making tough decisions in an ever changing environment? How do you properly manage stress that is part and parcel of this industry? Does your lifestyle sync in harmony with your trading routines? Are you physically and mentally prepared for the worst? Who do you turn to if all else fails?
If you couldn't answer all of them without pausing for long, then you ought to sit down and think hard about your long term prospects in this business. But don't despair. Rome wasn't built in a day, and so is your grand plan for a successful career in the retail trading business. Take it one step at a time, but never get lazy and slacken.
This is what distinguishes a professional from an amateur, the serious from the casual, and the wholehearted from the halfhearted. Being a professional in any field requires strong discipline. We truly admire professional sportsmen and athletes. They spend almost half of their time available each day, for 5 to 6 days a week, training for one event of a competition. Thousands of hours of blood, sweat, and tears all for that moment where they compete against others in a game of sport. Very few can achieve this. It takes a person with a vision, driven with determination and genuine passion.
There are huge risks involved with every potentially rewarding endeavor. Athletes risk injuring themselves permanently if they do it wrong, and it often happens; broken arms and legs, fractures, paralysis, risk normal humans would never want to bear. And there's the opportunity costs involved with dedicating their youthful lives to sport. What happens of they fail to "succeed"? Would they then have incurred an sunk cost, and live in regret?
Consider for once what you can accomplish through trading. Financial freedom, an enlarged mental capacity and deep maturity. Why wouldn't you give it your 100% once you're set on achieving those goals?
But back to professional athletes. You'll never see an Olympic weightlifter practicing just the two moves they they ultimately do on stage. They train in all areas physical and mental to be the most complete athlete they can be in their area of sports. Their main focus might be to lift the most amount of weight for their class, but to do that requires them to work on their entire body from the toe up. The same goes to basketball players, they don't just practice shooting.
They have strategies to defeat the apprehension and fear when they try to smash a personal record be it in practice or in competition. They study how their rivals lift, their weaknesses and strengths. Their coaches conduct intelligent surveillance on rival teams and employ the best tools and expertise in areas of performance and recovery to best prepare the athletes for competition.
Just like a weightlifter needs good power, speed, flexibility, balance, posture, conditioning, and an iron mind, a trader requires so much more than being able to read candlesticks on a chart. You can always tell the difference between a professional and an amateur by how their preparation work goes.
Your equivalent of a weightlifter being on the competition floor is being at your trading terminal when the markets are open, and when you're ready to execute trades at your own will. The catch is this: It isn't what happens when you're actually at your trading desk that affects your success, but what you did in preparation for that moment when you actually trade.
Your Preparation Affects Your Performance
Luck is when opportunity meets preparation. You never know where the markets will trade the next minute, hour, day, or month. However, you can prepare for different scenarios and have multiple attack plans detailing how you would approach the markets once prices start to move.
Things that seems superfluous, like your sleeping patterns, diet, physical activity and exercise will affect your overall performance and success in trading. Ask yourself, do you merely start your trading day after waking with a toothbrush in your mouth, in front of a desk strewn with rubbish looking at a chart of the dollar-yen? Or do you start a typical trading day by going for a walk in the park to get the blood flowing after a good night's rest, and then checking the markets on an immaculate working desk with properly maintained notes and to-do lists fore the week?
What puts you in a prime mental state? Trading is a game of probabilities, probabilities that are already slim themselves. You'll always want to be in tip top shape when you trade to maximize your odds of winning in the markets. Because why wouldn't you? This isn't a matter of question for the serious trader.
Once you start treating trading like a business, and not like a casual hobby akin to golfing during the weekends, you'll start to see big changes in many areas of your life and not just trading itself. Trading is a business and one that needs to be treated like one. Below are some tips you can do to help you treat your trading like a business:
- Make sure you are in a peaceful and quiet environment
You'll need to be in full concentration when trading. Anything that might distract you should be eradicated. Why risk that distraction from a text message or an Instagram like on your latest selfie. You can for a start, shut off your smartphone, stay away from social media like Facebook and Twitter, turn off all notifications that serve nonessential purpose to trading. Studies have shown any sort of distraction, even for a brief moment (like when reading a text message), can reduce brain performance dramatically. Sometimes we do stupid things for no gain but with all the risks.
- Maintain a trading journal consistently
Like in any business, the more information and data you have about your business (yourself in trading), the more bandwidth you have to make the correct decisions in the future. Take some time to observe professional gamblers. Did you actually think those guys stepped into a casino with briefcases full of hundred dollar bills unprepared? Not a chance. Professional gamblers are there to win and make money. They stride on to the dealing floor with an arsenal containing archives full of information they and their syndicates have gathered about the players they are up against, information about how they bet, when they bluffed, the cards they held in their winning hands, and how aggressive they usually are at the table. In any game of probabilities, trading being one of them, information gives you an edge over your past self. The more information you have about your trading habits, strengths and weaknesses, your risk profile and tendencies when you're winning or loosing, the more you're able to work with to improve your trading. A journal helps you document all these over time. You will start discovering things about yourself that previously never saw. Sometimes fixing one or two habits will help you turn the corner. Review your trade journal after each trading session, and once a week before you start the week so you know what mistakes to avoid from the last week and what worked well. Be your own teacher.
- Maintain a proper workstation
This is a point many traders ignore, but what all successful traders have in similarity. Always make sure your work space is clear. Clutter and untidiness in and around your workstation (and home in general) translates to clutter in your mind. Imagine stepping into a filthy and messy room filled with air as stale as blue cheese? Did you feel comfortable in that space? Hell no! Most of the highly revered modern architectural works usually look clean and organized. Sure, they can be chaotically artistic and busy in their own right, but complications doesn't necessarily equate to clutter. You can have a workstation filled with whatever you need to trade properly, but make sure they are neatly organized and there is some structure to all of it. Clean up your space and your mind will become more focused. You may also want to hang up images on the walls of your workstation. Images or works of art that inspire you towards your trading and life goals; something that inspires and motivate you to work hard. All these little additions serve as subconscious cues to help you remain progressive.
- Your trading plan
Like all savvy investors and business owners, you'll want have a trading plan to outline your career in trading. Your plan has to be specific but broad looking at the same time. For starters and newcomers, you’ll likely not be able to fully create a plan based on your limited experience and track record. Just remember that no bank trader, hedge fund trader, prop or flow trader trades without a plan that they consistently follow. Here are some of most important details to include in your trading plan:
- What markets and instruments you trade, follow this strictly and don't deviate
- What times of a day, and which days of a week do you trade, have reasons for each
- What systems do you trade on, you can employ multiple strategies for each system
- What is your approach and principals to risk and money management, this is crucial to keep you in the game
Trading is a lifelong journey, from the moment you start your first trading account to the moment you finally come to terms that you've made it as a successful self-directed professional retail trader, able to fund a well balanced lifestyle that is above society's average.
Progress is only made if you have the correct mentality. Treat trading like a hobby, or something when you do as and when you feel like it, and you'll eventually loose your pants and do charity to other more deserving traders.
Trading is a business and should be treated like one. Visualize yourself running your restaurant chain, and then put yourself in the shoes of your imaginary self. Would anyone continue in their old snobbish ways once they understand that their own business is on the line? We'll leave that for you to answer.