Trading as a Business: Part 2

Following on from Part 1, now that we understand the mindset involved in trading full-time let’s delve a little deeper into the strategy side of things. Besides having a business owner’s mindset, you will also need to adopt a trading strategy.  A “strategy” is simply a fancy word for having a plan of action that shows how you are going to achieve a long-term goal, which in this case is an ongoing and profitable trading business. What are some of the factors professional traders might consider when creating their trading strategy?

1. It’s about giving yourself options:

The first part of any strategy is to consider what market to trade. Professional traders do not look for that one particular market that is perfect for them. Instead, they will be scanning several markets at any given time, looking for potential trades and measuring each opportunity against predetermined trading criteria. A set of solid trading criteria helps you to pick only the best trades; and these criteria are not limited to one market or one given timeframe.

2. Select solid trading criteria: 

What are some trading criteria a professional trader will look at? Here at Trade with Precision, we look at price action and trends. There are many other indicators and technical analysis tools you can use as part of your strategy, but since all of these are based on price itself, we believe that price action carries the most weight. It is also vital to have a sound understanding of trends as these dictate where the market is headed. The market can only go up, go down or go sideways – therefore if you understand trends, you will be more likely to correctly identify a continuation of trend or turning points in market direction, potentially very useful knowledge to have!

3. Focus on money management:

In any business, cash flow is key. In trading as a business, we manage cash flow by focusing on money management i.e. the amount we risk on a trade. You may have heard professionals talk about risk-reward ratios, or first and second (even third) targets etc. These all relate to money management and as a rule of thumb, you should start with first targets only on a 1:1 risk-reward. This means that for every $1 you risk you would aim to get $1 back in profit. Some of you may be thinking that this does not sound like the glamourous, high-flying life of a trader, but it is sound business practice. Warren Buffett, one of the wealthiest men alive, has a good mantra about money management. Here it is: “I have two rules. Rule number one is ‘never lose your capital’, rule two is ‘never forget rule number one’.” If it works for him, it should work for you!  

4. Keep records, learn and improve.

Practice makes perfect but those who do not learn from their mistakes are doomed to repeat them. Many traders do not keep good enough records and therefore fail to identify where they need to improve. If you really are committed to running a successful trading business, then it is vital that you document your trades, identify areas of improvement and invest in the education you need to become a better trader. Even professional traders need to do this, and an additional benefit of having good records is not having to scramble when tax return time comes around.   

If you want to learn more about strategy, we have free webinars on this topic available this month live and on-demand.

Happy trading!  

Regards,
The TWP Team