While trading differs from many other industries, it is still a business, and you must approach it with that mindset. Many traders go wrong from the start by treating trading like gambling, rather than a structured business that demands careful planning and comes with real expenses.
If you aim to succeed as a trader, the first crucial step is to manage your trading like a business and view it through that lens.
As with any business, your profits in trading come from generating more revenue than the costs you incur. Similarly, you will lose money, and potentially “go out of business,” if your expenses exceed your revenue.
Your Operating Costs in the Trading Business
Losing Trades
The primary cost of running a trading business is losing trades. Yes, losing trades are an unavoidable expense, and it’s essential to view them this way. Shifting your perspective to see losses as a natural cost of doing business helps reduce emotional reactions when trades don’t go your way. Consider this: a restaurant owner doesn’t get upset about restocking supplies or paying employees, because those are just part of running the business.
Similarly, your largest expense as a trader is the losses from losing trades. Every trader, regardless of profitability, experiences losses. You can’t eliminate them, so instead of trying to avoid losses, accept them as a normal cost of trading and focus on managing them effectively.
Another, smaller cost of trading comes from broker spreads or commissions. This ongoing expense occurs every time you enter a trade, so it’s important to treat it as a real cost of doing business. Day traders, who execute more trades, face higher costs from spreads and commissions compared to swing traders, who trade less frequently.
Setting Up Your Trading Office
One of the next significant costs you’ll encounter as a trader is setting up your trading office. This expense can vary greatly depending on individual preferences, but at a minimum, you’ll need a reliable laptop, along with a comfortable desk and chair. Some traders might invest in multiple monitors, a high-end computer, or an ergonomic setup, which can get costly. However, none of these extras are required for profitable trading. A good laptop and a stable internet connection are the essentials.
The Pros and Cons of Trading Costs
Now that we’ve covered the main expenses involved in trading, let’s start with the good news. The good news is that your costs are relatively simple and easy to identify. There aren’t many of them, and you can control these costs effectively. Managing risk is key to containing your expenses. This means never risking more than you can afford to lose on any single trade, which can be accomplished through the use of stop losses. Placing your stop losses wisely is crucial not only for managing risk but also for maximizing potential rewards. In fact, a well-placed stop loss can be the deciding factor between a winning and a losing trade.
Now, onto the bad news. If you fail to manage and control these costs properly, they can escalate rapidly. Poor risk management can lead to losing your entire trading capital much faster than in other types of businesses.
Understanding this downside of trading costs should motivate you to revisit the previous section on the good news—because although costs can spiral out of control, they can also be managed and contained. The responsibility is entirely yours.
With this understanding of the primary costs of running your trading business, you can now focus on your goal: ensuring that your winning trades (revenue) exceed your expenses, allowing you to generate profit.
How to Make Your Trading Business Profitable
Now it’s time to focus on how to run your trading business profitably, rather than at a loss. While consistent profitability in trading requires various skills and strategies, I’ll outline the key areas you need to concentrate on.
As discussed earlier, a trading business becomes profitable when your revenue (profits from winning trades) exceeds your costs (losses, office setup, etc.).
So, what can you do to ensure your trading revenues significantly outpace your trading costs? Here’s a brief guide:
- Focus on Risk-to-Reward Ratio – Before entering any trade, assess whether the potential reward is worth the risk. Aim for a reward of at least 2R (twice the amount you’re risking) or more. Proper stop-loss placement is essential to protect yourself while allowing for the best reward.
- Trade Less, Trade Smart – High-frequency trading isn’t necessary for success. Instead, prioritize quality over quantity by taking high-probability trades. Focus on trading properly rather than trading often.
- Prioritize Money Management – Effective money management is critical to trading success. This means controlling risk on every trade, ensuring a potential reward of 2R or greater, and managing your trade exits wisely. Many traders obsess over entries or rely on indicators, but the true focus should be on managing risk and maximizing profits.
- Master Price Action – A deep understanding of price action is the foundation of successful trading. If you can’t read price movements on a chart, you’ll struggle to make informed decisions. The core of any profitable trading business is the ability to interpret and trade based on pure price action.
By focusing on these principles, you’ll be well on your way to making your trading business profitable.
Conclusion
Your next step is to create a solid trading plan. A well-thought-out yet concise plan is essential for running a successful trading business. You can’t simply ‘wing it’ and expect consistent success. Unfortunately, this is what most traders do, and the result? Most end up losing money and eventually giving up.