9 best steps to approaching trading as a business

September 25, 2016 06:00

Dear Traders,

Most traders believe that they treat trading as a business, not a hobby.

But how do you know if you are ready to do trading business?

Today's post presents nine fundamental building blocks of any serious approach to trading.

Only the most critical elements like choosing the best software are included.

Maybe your approach lacks solid business acumen or perhaps it's already fit-for-purpose.

Only one way to find out, right?

Motivation and persistence

Your motivation is the motor behind the persistence needed to succeed in trading...

...and many other things in life.

The first step is to carefully think about why you want to trade the Forex and CFD markets.

Begin by writing down your intrinsic (e.g. freedom) and extrinsic (e.g. a purchase) motivation on paper.

You can also print it out, if you like.

Now:

  1. add visual reminders, like a drawing or an image of your dream car, island or house
  2. keep that picture in front of your PC and around your home.

You will be able to draw on the above motivation during the consistent up/down movement of modern trading.

A little bit of stimulation goes a long way.

But above all, be persistent – especially when dealing with tougher times.

Persistence will also be in high demand when you start working on your goals.

Your state, goals and closing the gap

Goals can be seen as measurable units that break down motivation into actionable parts.

Whereas the motivation is a grand vision of the future...

...goals are more concrete steps that ultimately lead to your vision becoming a reality.

And while creating those goals, follow the well-known SMART formula, i.e:

  1. specific: answer questions like who, what, where, which and why
  2. measureable: enable criteria for measuring progress by answering questions like when, how many and how much
  3. attainable: analyse whether you have the skills, financial capacity and abilities to reach your goal in the desired time frame
  4. realistic: check whether you are able to work towards a balanced yet ambitious goal (too easy is not motivating, too hard is not realistic)
  5. time-bound: set up a time frame and time table for the goal.

For example, the goal "I want to buy a new house" is measurable but not time-bound or specific.

So how do you make it SMART?

Conversely, a SMART goal would be to purchase a house with a:

  1. minimum of 80 square metres in the neighbourhood W, X or Y
  2. maximum price of EUR 200k
  3. max 80% mortgage
  4. before 2019.

Your software choice

You need to choose software that supports your specific trading style in the best way possible.

The software choice is critical because it simplifies or automates trading decisions and actions.

For instance, the MetaTrader 4 Supreme Edition plugin from Admiral Markets, we believe, offers more than 100 features and multiple advantages over other current market options:

  1. simple trading: mini-terminal, trade terminal
  2. charting package: charting tools and indicators, mini charts, tick charts
  3. easy management: alarm manager, trading simulator, Connect
  4. extra analysis: correlation matrix, correlation trader, sentiment trader.

Last but not least, good software offers the proven benefit of easy trading access, which is why Admiral Markets offers:

  1. MT4 WebTrader version
  2. a cost-free demo account to test software without risks.

Your trading plan document

The trading plan is at the heart of your trading decisions.

It specifies how you will:

  1. analyse trend, momentum, patterns, support and resistance
  2. enter, trail and exit the market.

Basically, the trading plan details your approach to your Forex trading business.

For instance, I use the following concepts in my trading plan:

  1. moving averages for trend and momentum
  2. trend lines for chart patterns
  3. Admiral Pivot Points and Admiral Keltner for support and resistance
  4. Fibonacci levels and candlestick patterns for entries and exits.

Your trading plan enables consistency over time because otherwise your trading could vary every day based on your emotions.

My advice is to build experience with a relatively simple approach but improve when possible and avoid looking for the perfect system.

Your trade management style

Within each trade, you have an option to:

  1. manage the setup (active management); or
  2. not change the original parameters of the exit (passive management).

Actively managing a setup allows for a greater degree of control and precision, because you can change your exit depending on how price action develops, but:

  1. it requires more of your time
  2. due to its high intensity, it is often tougher on your trading psychology (although this may vary for each trader).

Passive trade management is also known as "set and forget" and offers the reverse pros and cons of active management (less precise but also less intensive).

My best advice on trade management is this:

  1. when starting, choose a passive trade management system at first
  2. then test, measure and monitor one (small) change to see if the plan improves (repeat process until ready)
  3. never change your trade management approach during a trade setup (always think before and after a setup and use data to measure its impact)
  4. apply a varied approach of loose–tight trade management (see video below).

Your risk management plan

Risk management offers traders the chance to largely preserve their trading capital even when they encounter a drawdown (a losing streak).

A risk management plan, therefore, specifies how much risk is taken per trade and what the risk limits are per day, week and month.

As a trader, it is important to:

  1. decrease the risk on a single trade because it increases the number of consecutive losing trades needed before 10%, 20% (or more) of the capital is lost
  2. keep your trading capital largely intact, so you can trade another day
  3. be aware that a certain level of drawdown is always expected, regardless of how cautious you trade.

Of course, protecting the trading capital is key to a Forex trading business, but protecting the mental capital is equally so.

And that leads us to the next topic.

Your trading psychology approach

Trading psychology affects a trader's ability to implement the setup according to their trading plan.

Fear, impatience, hope and greed all contribute to rising emotions, which leads to flawed perception and trading biases, like the sunk cost fallacy.

An effective method is to customise the trading strategy...

…and base it on your own risk tolerance and trading psychology (preferences).

Furthermore, a trading psychology plan should provide various details, such as:

  1. what are the weaknesses of the trader in this field
  2. when and why does a trader show emotions during trading (at what moments do you become fearful, impatient, etc.)
  3. what ideas and actions can be implemented to manage emotions
    1. for instance, an emotional checklist before trading, entering and exiting could help traders recognise if they want to revenge trade
  4. which ideas tips and improvements work well – for this, you need evaluations.

Point 4 explains why completing evaluations and collecting feedback is vital (see point 9).

Your approach to education

As mentioned earlier in this article, traders should avoid searching for the perfect system…

…but this should not block traders from improving their skills.

Traders should keep learning new material to find ways how to improve their trading plan.

At the same time, traders must remain critical about what they add and always remain focused on what elements of their plan are redundant and need to be removed, too.

One of the best methods for learning are analytics, the library of articles and the live trading webinars available at Admiral Markets.

Your testing and evaluations

Evaluations are important not only from the perspective of trading psychology but also for measuring the implementation of these aspects:

  1. single trades
  2. your trading plan
  3. your trade management plan.

Feedback is the key to learning and improving...

…which wraps up our discussion on approaching Forex trading as a business.

In my opinion, these steps are the most important aspects.

But maybe your experience is different?

Let me know in the comment section below.

Cheers and safe trading,

Chris

Avatar-Admirals
Admirals An all-in-one solution for spending, investing, and managing your money

More than a broker, Admirals is a financial hub, offering a wide range of financial products and services. We make it possible to approach personal finance through an all-in-one solution for investing, spending, and managing money.