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What You Need To Know Before Trading as a Business (Part-Time or Full-Time)
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Dec 11, 2024
Can you answer these five critical questions that you should know before you start trading part-time or full-time? Trade like a business. ✉️ Learn the secrets of legendary traders and investors: https://bit.ly/4aCna7i 🔗 Follow along: https://analyzingalpha.com/blog/trading-business #trading #technicalanalysis #tradingbusiness #daytrading #swingtrading 00:00 Introduction 00:30 1. What’s Your Why? 01:20 2. You Need An Edge 03:21 3. What’s Your Risk Tolerance? 07:10 4. What are Your Return Assumptions? 07:15 4.1. Estimated Annual Return
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0:00
everyone wants to make money and
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everyone wants to be free and the great
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thing is you can do both by becoming a
0:05
professional trader in fact i've created
0:07
a full-length guide here that'll teach
0:10
you how to start your own trading
0:11
business and whether you want to go full
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time or this is a part-time gig for you
0:15
you should watch why because trading is
0:17
most successful when it's done most
0:19
business-like but before you watch that
0:21
video there are five show-stopping
0:24
questions that you need to ask yourself
0:26
before embarking on your trading journey
0:28
the first being what is your why
0:30
why do you want to be a trader many
0:32
traders start trading because they want
0:34
to get rich and now it's absolutely
0:36
possible to get rich trading however
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understand that if you're not a
0:39
profitable trader already the chances of
0:42
success are slim in fact most studies
0:44
say that only five percent of traders
0:46
become profitable and according the sba
0:48
or small business administration a
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survey done in 2019 this is in stark
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contrast to starting a business where 33
0:55
percent are still around after year 10.
0:57
in other words if it's money you're
0:59
after it's much easier to create a
1:01
business than it is to become a
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profitable trader and no matter how
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smart you are
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trading will slap you around until
1:07
you're begging to quit trust me i have
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been there multiple times and you need
1:11
more than the pursuit of money to keep
1:13
you in this game you need an unwavering
1:15
passion to play you need an advantage
1:17
you need an edge
1:19
an edging trading is an observation or
1:22
an approach that creates an advantage
1:23
over the rest of the market players
1:25
anything that can add a few points to
1:27
the winning side of the equation builds
1:28
an edge in your favor and most traders
1:31
lose money in the financial markets
1:33
because they lack an edge i'm going to
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say something controversial here
1:37
risk management is not an edge it's just
1:39
sound trading and i can prove it let's
1:41
play a coin toss game if you guess
1:43
correctly you get a dollar and if you
1:45
don't you lose a dollar you can play
1:47
this game all day long and cut your
1:48
losses short but you're never going to
1:50
make a million dollars why because you
1:52
have no edge the probabilities are not
1:54
stacked in your favor you need an edge
1:56
to make it full time and you need
1:58
multiple edges to make your career you
2:00
need to be the casino you need to have
2:03
multiple edges that compound over time
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don't be a gambler and have the odds
2:07
stacked against you so that begs the
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question how do you find an edge well
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most edges come from a better
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understanding of market structure faster
2:15
execution or better data and analysis
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for example a market structure edge and
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that simply means you just understand
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how the market works better than other
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participants may be the exceptional
2:25
ability to exploit the post earnings
2:27
announcement drift anomaly another may
2:29
be the early identification of trends
2:31
through sophisticated technical or data
2:33
analysis you want to ensure that you're
2:35
on the right side of the stock market or
2:37
whatever market you're trading as much
2:38
as you can and if you're struggling to
2:40
find an edge i've got you covered i back
2:42
tested scotland's slingshot trading
2:44
strategy at a high level to verify if it
2:46
had an edge which it does and if you're
2:48
not familiar with scotland he's a
2:50
professional trader he shares his trades
2:52
publicly on twitter and he has multiple
2:54
triple digit years under his belt with
2:55
his highest being 305 percent and last
2:58
year being 150
3:00
scotland wanted to find a way to get
3:01
into strong stocks before the run up and
3:04
invented this slingshot training setup
3:06
this is one of his many edges and this
3:08
setup can work for you too assuming it
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meshes with your market philosophy and
3:12
psychological makeup but more on that
3:13
later once you've successfully
3:15
identified and defined your edge or
3:17
better yet edges is time to consider
3:19
your risk tolerance which is number
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three
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risk tolerance refers to the degree of
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risk you're able and willing to take and
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while there are multiple ways to define
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risk we'll consider volatility and
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drawdown for our purpose since your
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comfort level with uncertainty
3:33
determines your risk tolerance it can be
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challenging to be aware of your risk
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appetite until faced with a potential
3:38
loss you should still strive to gain a
3:41
clear understanding of your risk
3:42
appetite though and your ability to
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stomach large swings in the value of
3:45
your portfolio why well when traders
3:48
trade above their risk tolerance levels
3:50
at best they'll lose sleep and make sub
3:52
optimal decisions the next day and at
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worst they'll sell out at exactly the
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wrong time
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risk tolerance is all about
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understanding yourself a key
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characteristic you should possess as a
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flourishing trading business owner and
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let me tell you when you start a trading
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business and it becomes your primary
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source of income your risk appetite will
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change a lot this even applies to
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algorithmic traders like myself most
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traders greatest struggle when it comes
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to establishing a profitable training
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business revolves around trading
4:18
psychology in fact i don't think finding
4:20
edges in the market is the most
4:22
difficult task as a flourishing trader i
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just showed you the slingshot strategy
4:26
which is a potential edge that you can
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incorporate into your trading what's
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hard isn't knowing what you should do
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it's doing what you should do it's
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trading like a business and risk
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tolerance is just one aspect of trading
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psychology trading psychology refers to
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the emotional aspects of an investors or
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trader's decision making process it's
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how the emotions affect your trading or
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and trading affects your emotions and
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there are some important considerations
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to make here
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most traders fall into the trap of
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thinking they can achieve trading
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success with little thought of their
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psychological makeup and let me tell you
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fighting the market is hard enough let
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alone when you're fighting with yourself
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too successfully aligning your trading
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strategy with your psychology implies
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you may need to give up or change some
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of your values and beliefs
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for instance do you value the need to be
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right a trader who values the need to be
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right is more likely to refuse to set a
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stop loss and take a small percentage
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loss in case the trade goes haywire
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another example might be do you do
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overnight moves keep you up at night
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then if that's the case perhaps a day
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trading style is better suited for you
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you need to find a trading style that
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suits your trading psychology and
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addresses your strengths and weaknesses
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this doesn't mean a risk-averse person
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can't adopt a swing trading style it
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also doesn't mean that if you value
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being right you're perpetually going to
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be wrong when it comes to following your
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stops it just means that traders need to
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understand why they're embracing a
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trading approach and have safeguard
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against their deficiencies and often you
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can flip a weakness on its head for
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example let's go back to someone
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struggling to stop out the first issue
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might be that they do not understand
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what they're trading and why they're
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trading it if they're trading specific
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mean reversion scenarios they shouldn't
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be using stops at all position sizing is
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actually the key to risk management in
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this scenario however let's assume that
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trader was a long-only swing trader if
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they're a breakout trader not following
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the stops likely they don't have a deep
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understanding of what a breakout is and
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why they work now i could spend hours
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discussing breakouts but for now let's
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understand two things roughly 70 percent
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of breakouts fail and successful
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breakouts rarely retrace to the low of
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the day with this market knowledge a
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trader now can be correct and still stop
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out they understand that their win
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percentage should be between 25 and 35
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percent and they understand where to
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place their stop and why i often find
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understanding solves most trading
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psychology challenges and now we're
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almost done with the five show-stopping
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questions remember the first was know
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your why you know why are you doing this
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the second is making sure you have an
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edge the third is aligning your
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psychology to your trading strategy and
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the fourth and fifth are about making
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sure you've got enough capital in time
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to be able to make this work and you
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start off by understanding your return
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assumptions now return assumptions refer
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to the rate a return an investor or
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trader expects to make from their
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trading activities right so all active
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traders really have one goal in common
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is to utilize their trading capital to
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make as much money as possible while
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assuming a certain level of risk for
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that reason it's critical to set your
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expectations right to figure out a rough
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idea of what return you might achieve
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before you kick off your trading
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endeavors especially if this is going to
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be your full-time gig so how do you
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determine a reasonable rate of return
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well whether you're a you know regular
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regular business or a trading business
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the answer is the same you need to look
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at your return history and your
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competition's average annual returns for
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each individual system or set up and
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determine whether or not you know that's
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a number you can realistically achieve
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and this number what you think that
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you're able to achieve is called your
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target compound annual growth rate and
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it's critical that you get this number
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right because it's the basis for all of
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the other calculations and thinking
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whether or not we can actually make this
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trading business work both by how much
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profit we should be making and how much
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capital we need to make this business
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run so to keep the math easy if you make
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ten thousand on a hundred thousand
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dollar account your average annual
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return is ten percent
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unless you have a history to back it up
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investors shouldn't set their cager
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above 15
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and traders shouldn't set their care
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above 40
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now i know some of you might think that
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these compound annual growth rate
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numbers are tiny but remember
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exceptional returns are the exception
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and not the rule and if you're curious
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on some of what other hedge funds are
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generating you can check out the
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associated website article for this
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video now what is the bare minimum that
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we need to make this is called the
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minimum absolute return so with an
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understanding of what you're likely to
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achieve it's time to figure out exactly
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what you need to achieve this minimum
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absolute return refers to the minimum
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return that you set over a period of
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time this return needs to cover your
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business expenses which i'll cover some
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samples shortly and your owner's draw
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the draw is the salary that you need for
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you and your dependents living expenses
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the minimum absolute return is typically
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your break even level it's not the
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target and now the target absolute
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return is pretty easy to figure out
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we've already calculated what we expect
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to make through the target keger right
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now all we need to do is take that
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percentage and multiply by our starting
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capital and that should be how many
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dollars we should make at the end of the
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year so we're almost there we almost
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know exactly how much capital we need to
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make but the first thing that we need to
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figure out is how much capital we might
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actually lose and that is the our
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maximum drawdown this maximum drawdown
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refers to your maximum downside risk
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over a bearing it's a maximum observed
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loss from peak to trough so for instance
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if your portfolio value is a hundred
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thousand and you lose thirty thousand
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your drawdown would be thirty thousand
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minus a hundred thousand divided by a
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hundred thousand or thirty percent which
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is thirty thousand dollar terms it's
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important to note that maximum drawdown
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only measures the extent of the most
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considerable loss it excludes the
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frequency of significant losses and
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maximum drawdown is used to determine
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how much capital you'll need to start
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your trading business assuming you've
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included multiple market cycles in your
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analysis armed with an understanding of
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your minimum absolute return and your
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maximum drawdown we can finally
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determine how much capital you'll need
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to start your trading business and
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capital required really just refers the
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amount of money a trader needs to carry
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out their trading activities with the in
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the financial market so consider your
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capital is essentially the raw material
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that powers your trading activity in the
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stock market or any market and really
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it's really the raw material that powers
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any business for that matter but let's
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go through the math and i'm purposely
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not going to go through leverage here
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because you can reduce your initial
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capital using leverage but there's other
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risks that you need to think about which
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i'll discuss a few of them later on but
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remember these are unlevered returns so
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let's go through the math if you need to
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generate 50k per year and you expect
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your minimum compound annual growth rate
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to be 10
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you would need 50 000 divided by 10
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percent or 500 000 without a drawdown
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keep in mind if your kaggar return is 10
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you probably shouldn't be uh trading
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anyways but i'm keeping the numbers
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simple just for explanation purposes but
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remember you have to figure out that
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drawdown and a drawdown of 20 on a
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starting capital of 500k is another 100k
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or 600k so you need 600k in order to
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make this trading business a reality and
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obviously i know 10 returns are terrible
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but the point being is you know what
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starting a trading business isn't free
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it's not free for money and it's not
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free for time and when you first start
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out just like any business you need to
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spend tons and tons and tons of time to
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get this thing off the ground if you're
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an algorithmic trader you've got to
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build out your systems and your process
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potentially build your own back testing
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library and create different strategies
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and implement them and if you're a
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discretionary trader the same thing is
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true you need to take a look at the
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markets understand why they worked and
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moved the way they do build your
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different various setups and test them
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on your you know on yourself build up
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your trading and market intuition and
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your situational awareness in fact you
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know at first it is so overwhelming and
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there's so much time that you have to
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put in and it gets easier they say that
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the first million dollars is the hardest
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and that's so true once you get your
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systems in place and figure out what
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you're doing it gets much much easier in
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fact sometimes it even can be lonely at
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times because you know there's really
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not nearly as much to do believe it or
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not but again that is way down the line
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not right when you first start so if
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you're excited and you pass these five
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show-stopping questions one you know
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your why two you've got that edge three
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you understand your psychology and why
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you're trading the strategy that you're
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trading four you've got the capital that
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you need to make it a reality and five
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you're willing to put in the time then
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you say yes i can make this reality and
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you can follow this video up here to
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figure out how to create this thing like
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a business because as i always say
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trading is most successful when it's
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done most business like hope you enjoyed
13:08
this one and see you in that one bye
13:30
you
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