THE BLOG

Trading: A Business!

17/11/2014 14:56 GMT | Updated 17/01/2015 10:59 GMT

Investing is a must!

Any serious career choice or business venture requires investment. The different forms of academic studies usually require a university degree and maybe a masters followed up by additional courses of specialisation which can all cost in the 10s of thousands. A professional sportsman or athlete has usually forked out very good money for a top coach and the best possible equipment. An app requires serious investing when it comes to being designed, tested and programmed. I have seen one of my closest friends, Michael Jablonka, an awesome guitarist and creator and lead singer of the band The Dark Tides, invest heavily over the years in customised guitars and various pieces of music equipment to turn his shed into a state-of-the-art sound proof studio. I have seen the hours gone into writing songs and performing gigs to build a presence and following on the music scene. This is now starting to pay off for him as leading music insiders have taken notice of The Dark Tides and labels and top managers are lining up to represent them. The pattern here is that success requires investment and time. Very rarely is success instantaneous and achieved on a shoestring budget.

Trading the financial markets must be viewed in exactly the same light. Trading is a business but investing into it is regularly overlooked and deemed unnecessary. The small minority who do are the ones that are around long enough to reap the rewards and the benefits of the lifestyle changes trading success will bring.

Trading is like a 3-piece jigsaw where each piece needs understanding and investing for them to slot together and paint a successful picture.

These elements are:

Knowledge

Trying to master trading without proper training is a difficult, costly and an unnecessary approach. Like anything else there is no replacement for guidance from an expert. However, finding the right knowledge is a real challenge for those wanting to enter the trading world. The internet is awash with incorrect and misleading information as well as bogus courses ranging from the ridiculously cheap to the absurdly expensive. Cheap courses are simply meant to be cheap access to quick-riches. In life, you get what you pay for. The overly expensive courses are also assumed to fast track the student to millions by the suave frontman (and woman!) who run these courses. However, these courses use clever psychology and marketing techniques to dupe individuals into stampeding to the back of the room and laying down their hard-earned cash.

When I decided I wanted to learn to trade, I was very clear on my route. On a personal level, I have always preferred being taught 1-2-1. I wanted to be taught 1-2-1 by a full-time private trader who already had the tools and techniques that I simply needed to put into practise and master with their guidance. I was more than happy to spend good money but I wanted value in return. I learned this from Warren Buffet; look for value over cost.

Knowledge is fundamental to trading success so a good course is essential to get under your belt. A good course is one where in addition to the 1-2-1 training, you are also taught on specialised software and where you will be part of and have consistent support of a like-minded community of individuals throughout your journey. This will remove the feeling of isolation that many private traders have in their early days and will keep them on the right path to trading success. It is also an environment to be accountable to which is crucial as a trader.

Tip: Trading does not have to be expensive to learn. Be aware of the business model of choice of continuous upselling from a relative cheap to far more expensive courses. Always ask if there are any other courses and do research before paying. You will be surprised what you find. I can pretty much guarantee that the "this is only open to the first 50 people who pay today" offer will be available in a week or a month's time.

Trading software

Professionals in any industry want the best equipment possible to deliver the best results. Professional traders are no different. Full-time traders invest in good software for several reasons.

It scans and highlights the handful of the most lucrative opportunities in what is a huge field of investable instruments.

It helps to get trading down to minutes a day so it can be adapted around any lifestyle.

It allows for customised tools to be built that gives a serious trader that much needed edge to see consistent returns.

Good software is essential and it does not have to be expensive. It is simply a cost of running trading as a business. It is, in comparison, far cheaper to maintain on a monthly basis than say the monthly rental cost of an office in London. However, many choose to use free-source software that is readily available on the internet or the free charting packages provided by brokers. Serious traders do not use these as they lack functionality and will not give you the edge you need. They are free for a reason. Value over cost remember!

Tip: There are good brokers in the industry and ones that I would recommend. However, free charting packages that come with opening an account are designed simply to get you to fund that account and to get your trading, regardless of your level of experience. Always seek trading advice from a full-time trader as our long-term approach is different to the shorter-term approach that most educational arms associated to a brokerage firm will encourage you to do. Growth on your account is made through a few large winners and not through a large frequency of day trades.

Funds in a trading account

You need money in an account to trade. I would recommend starting with a small amount of between £2000 and £3000 in a basic account to get started and to focus on the Forex market for the first 6 months to a year. What a trader then wants to focus on is a good percentage return on that account. In your first year you can typically see a return of around 30% but with experience and as you branch out into other markets, such as stocks and commodities, returns will be far greater. Do not make the classic mistake of putting your life savings in an account and blowing it all within days in a heat of gambling madness. Capital preservation is fundamental at all times. Once you have gained the knowledge and discipline of a trader, you can then up the stakes by funding your account with more money. You will have gained an appreciation by then of how money is really made in trading. Slow and steady wins the day. (As a reminder, I wrote a previous article on how full-time traders and investors use the power of compounding to accelerate profit.)

Having a broker account naturally comes with costs to maintain the account. These are usually in the form of spreads and rollover charges. The spread is the commission the broker takes for matching the buyers and the sellers. Rollover charges come into effect when you hold positions overnight.

Again, these are simply costs of running trading as a business but there are ways of keeping these down to a minimum. High-frequency traders will pay heavily in spreads for every time they enter a new position, they must pay the spread, which is why a broker will encourage you to be in and out of positions multiple times in a day. Their agenda is different to ours. As already mentioned, the most successful full-time traders are long-term holders of positions. We know that serious growth is made through a few large compounded winners and not many small winners. We typically open as many positions in a year as most will open in a week or a month. Spreads for us are simply a small cost to gain access to the market. We are then open to higher rollover charges as short-term traders argue but these again are kept to a minimum by using future contracts where you are not charged a daily rollover fee. Let me stress that even if you are charged daily, the rollover fee is minimal compared to the returns made.

Tip: An advantage we have as private traders is that we use spread betting accounts which means our returns are tax-free.

The complete jigsaw

Once you have all of these pieces of the jigsaw in place, you give yourself the strongest possible foundation for trading success. There is one final element and that is "time".A business, on average, needs 2 years to see profit. Trading, in genera,l should be viewed in the same way but that really depends on how much money you start off with in your trading account. The first year is generally not about covering the costs invested into your career as a trader but about perfecting the rules of trading. It is from the second year onwards that you can look to start recouping the financial commitment you have made. Trading is a long-term project. Give it the time and investment it deserves, not only will you have covered your startup costs but potentially achieve the status that many want but very few achieve. That is to be funding a lifestyle from the substantial returns you are making as a full time trader.

There is no other business with the minimal overheads that trading has compared to the potential tax-free returns trading can give you in the time needed to maintain it is a business per day. It is a unique opportunity open to us all that rewards you handsomely if approached with the right mindset.

To learn more about trading and the benefits it will bring, please register for my upcoming seminar on the 20th of November. It will be an educational and informative evening where you will have the opportunity to liaise with successful trend traders and find out about their trading approach.