Last updated on April 5th, 2018
Trading is a business and that is something that all successful traders believe.
I know it can be hard to imagine that you are actually a company when you sit in the comforts of your home and push some buttons.
If you don’t believe it is, then it is something you should not venture into. You can trade the markets as a hobbyist but there are many other hobbies you can pursue that don’t have the same negative affect on you that trading can have.
If we can agree that trading is an actual business then we should consider this fact: About 80% of new businesses survive past their first year of operation.
That is pretty impressive but also consider that after five years, half of all businesses no longer exist and only 30% make it to a decade.
With a trading business, if we believe the statistics that are mentioned, about 85% of traders fail.
The problem with that number of failed traders is that what constitutes a trader is never defined.
What Makes You A Trader?
Does opening a trading account make you a trader? Does investing in a charting platform make you a trader?
Anybody can open a trading account and press some buttons to enter and exit a trading position. Does that define them as a trader?
It is difficult to assume everyone that places a trade is an actual trader if we compare how people approach the market.
I would be more inclined to define the following as a trader and someone with a trading business:
- Someone who has tested and defined a trading plan/edge
- Someone who regularly audits their own performance and tweaks what needs to be tweaked
- Someone that can avoid emotional trading and understand there are different “hats” to be worn in the trading business
From my experience, those three traits are not common among people who never gain ground in trading. This is not an exhaustive list but it’s a good start.
Your Trading Business Can Fail Like Other Businesses
It is difficult to nail down what constituents a trader with any degree of accuracy, let’s look at your trading business through the same lens as any business you encounter.
According to the 2015 – 2016 Global Entrepreneurship Report published by Babson College, over half of businesses that ceased operation did so for two main factors:
- Lack of profits
- Lack of funding
Those two issues are prevalent in the trading industry and if we again believe the reports about failed trading business, most never make any money and funding an account repeatedly, is an issue.
Let’s look deeper into the reasons that companies fail and let this be a warning as you venture into trading for a living or as a side business.
People starting for the wrong reason
This is a big one right off the bat. If you want to make loads of money, have much more free time or you just don’t want to work for a nasty boss, the chances are you’ll get a rude awakening pretty quickly.
To get through the early struggles and obstacles you might face along the road to trading success, it’s hugely beneficial to have a passion for it. You’ll only know if you truly have this passion through a proper understanding of the trading world and how markets move. Yes, making fast money can be a passion but that won’t keep you going through the losses.
Being under capitalized will not allow business a chance to grow
If you don’t have enough working capital to be able to cover running costs and absorb losses as you work towards establishing your business and the most appropriate way to operate it, you’re never going to be able to get to a point where you’re stable.
Overestimation of how much a business will earn is also common.
Then there’s the little matter of living costs. If you have forsaken the security of a steady check, you have bills to pay and that must be taking into account how much you need to make as a return on your capital. You must use your profit for living expenses and that can drain your trading account especially as you go through a string of losing trades.
No demonstrable skill
This might sound a bit like the chicken and the egg, but let me ask you in how many industries do people start a business before they actually learn to ply their trade? Those who do will face an uphill struggle.
Let me ask you a slightly different question. Would you invest in a start-up business where the main person either was yet to learn the required skills or had little to no experience in the specific industry?
This “skill” issue is a real problem in trading. If you can find a trading strategy with a true edge, you are in the minority. The edges in trading are small and the general theory you read on forums and on email giveaways, are mostly rehashed techniques that don’t have a true edge.
Pie in the sky dreams not in line with reality
When you first come across any industry or potential business opportunity there’s no certainty that your understanding of it, your product/idea and skills are a good representation of what’s really needed to be successful. Taking time to research and assess is crucial to getting a clearer picture in addition to the realization that as you gain more experience, your understanding may shift and certainly become more complete.
In the beginning, traders look at futures day trading as a means to “get rich”. Over time, many realize that they don’t have the capacity for day trading and then use a different market and approach in their business.
No plan for how the business will operate
Without a proper business plan, you will have little direction or targets and therefore no way of objectively reviewing its level of performance and the market it’s in. Without a plan a business may not be focused enough on a fundamental product or service which it does really well.
Time and capital therefore are allocated inefficiently and the resources are never put to best use.
With trading, a trading plan that outlines the tested variables you need to see to take a trade is a must. Without one, an in-depth review of what works and doesn’t or where the trader can improve other aspects of trading, is not possible.
You also must know if you are a day trader, swing trader, or a mix of both. How you approach the markets will differ depending on where you put your focus.
Ignoring the big picture is a mistake
Admittedly, it can be easy at times when you’re on a roll to just keep going in the same direction and not want to get distracted by just possibilities for the future. However, the reality of business and life is that nothing stays the same forever.
- Regulations change
- Business environments change
- Habits change.
Knowing what might happen before it does leads to potential opportunity. Not acknowledging change leads to going out of business. Think of the company who invented the digital camera. Think of what traditional mechanical hard disk drive manufacturers are starting to do now.
Business rarely changes overnight, but if you want to be in it for any length of time you’ll need to at the very least keep one eye on the big picture. For traders, understanding the bigger market context is important to ensure you are not surprised by the longer term trend changes.
Business rules don’t exist
In trading this usually comes as part of the plan. But any business must set rules in order to protect its future. The trouble is that rules can also be a hindrance as well as insurance against the worst case scenario. With the big picture in mind, rules might need to be adapted over time.
What serves you well now may not in the future.
Think about a strong uptrend where you continually buy but have made no rules to tell you when the buying should end. When that trend change happens, you will be swimming upstream and racking up the trading losses.
When someone who may have already been successful in their career starts a new business, the rules don’t necessarily come easily. Flourishing in an environment where rules are already in place is a completely different prospect to being able to set the rules yourself.
Being able to set good rules and stick to them can make all the difference to whether a new business (or any business for that matter) is a success or a failure.
Fail to review your progress
Without a plan, a business is likely to be doomed from the outset. Without a procedure to measure and review performance, a plan is useless.
Not being able to step back and objectively assess the performance of the plan, the market you’re in and the degree to which the plan has been followed will make it very difficult to ever make appropriate and well thought through changes.
Commonsense Trading Business Issues
The fact is, I very much doubt that any of these reasons for business start-ups failing will come as a much of a surprise.
Mostly it’s common sense. But then why do so many people fail to take account of these ideas? You must treat your trading like any other business and manage it well.
Give yourself the best chance to succeed and ensure you are covering the eight points listed above.