Trading for a Living Part 6 – Trading as a Business

Trading as a Business.

When we decide to pursue trading as a business it makes things simpler, reason being, we can now sit down and create a business plan for this venture. Many problems that afflict traders are due, in large portion, to not having an executable business plan.

Below is an example of a simple starting point. Setting down goals is the first step, this enables us to quantify progress. A goal without a potential solution, plan and responsibility is just a dream and dreams only become goals when written down and explained.

After a simple plan is created, we can get down to some detail on how it will unfold in a personal capacity. It is important to create a detailed budget on how money is received and spent. The budget should be setup to cater for the trading business in a way that it creates cashflow to fund the asset column which in turn should fund cashflow to the income column which can be reinvested to the assets column so that money can go around and continue to move – money sitting still isn’t working towards your goals.

Here is a good way of looking at it and breaking it down:

Firstly, assets are only assets if they add to your income. Never mix up your assets and liabilities. Liabilities should be reduced as much as possible so that new liabilities can be used to fund assets (specialised function should not be used to fund trading but rather to fund long term assets).

Secondly, expenses should be reduced to the point where there are no interest-bearing liabilities left, especially for personal use, i.e., credit cards, clothing loans, vehicles etc.

When you sit down to do the budget you will have to prioritise and decide where to focus, this will depend on circumstance and self-discipline. A rule of thumb is to target the largest expense first as it generally incurs the most interest in cash terms and then pay off the ever-smaller amounts. At the same time the asset column needs to be bolstered. Your trading account goal should be to have the same amount of cash in the trading account as your fixed expenses per annum and then build a savings asset to the same amount. Having the savings easily available means the trading account can grow and expenses will be drawn from savings and not the asset. This is for people who want to trade for living. Building the business does not mean you have to trade for a living but you may simply want to bolster your retirement savings, if this is the case the process is essentially the same except that you may not decide to have savings in cash but would rather boost the asset side by buying shares for dividends or properties etc.

A S.W.O.T. analysis can help identify weaknesses in the plan, once a weakness is identified it can be mitigated through further planning. You should focus on your strengths and improve them all the time. This enables you to follow other opportunities as and when they come up. The threats are things that may affect the outcome of the entire project. Now before you get upset about the spouse comment please understand that your life partner is a part of your journey through life and therefore, needs to understand what it takes to accomplish these goals. If they are not involved and onboard, the emotional tug of war can derail the best laid plans.

Time will have to be allocated to trading/investing as well as the learning process, this time needs to also be balanced between all your other activities family, work, reading, trading etc.

Working from home has a lot of positives and a few important negatives. The upside is that we are responsible for our own actions which leave us open to ill-discipline like running off for bread and milk at the most active market times or being split in our attention. This all needs to be planned so that you know when not to trade and when not to do other “stuff”. This requires immense self-discipline and buy-in from our partners.

 

Making money work for us is the ultimate goal, which requires experience and some capital to put to work. A timeline needs to be realistic – as with any new learning curve, it takes time and effort to succeed.

Keep in mind, quiet markets affect the potential for short-term gains, and they can continue for weeks and sometimes months, this has an impact on cash flow from trading activities. Boredom between trades is probably the most difficult thing to overcome as we tend to feel the “I have to do something” emotion.  This need to be active can translate into overtrading, rather try and focus on something else between the active market times for day traders. Longer-term traders/investors can have days to weeks between trade signals and that time can be used for research on alternative investment opportunities.

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