Did you know the failure rate for small business operators is sky-high? One of the reasons for this is that many people open shop without being prepared.
They may have a great idea… But they have no clue about what their operating expenses are, what their realistic projected revenues will be over the next year, and so on.
Many traders have the same issues.
They may have a great strategy, but they don’t know their numbers. They have no clue what their real average win rate is, what their average profit factor is, or how volatile their trading will be.
If you want to be successful as a trader, you must know your numbers and budget ruthlessly. Below, I’ll show you three steps you can take today to get started…
Step 1: Have a Business Plan
There’s no denying it… Most people who attempt to make money at trading are not successful over the long run.
When I first started working as a performance coach for a proprietary trading firm, one of the requirements for all the traders at the firm was to have an up-to-date and approved trading plan.
In essence, the trading plan was meant to ensure that the trader, and the firm’s management, knew exactly what it would take for that trader to commit the firm’s capital to a specific trading idea.
The trading plan would also lay out the methodology the trader would use to pick a trade, as well as what it would take to exit that trade, whether for a profit or a loss.
I have written many trading plans over the course of my career. But here’s what I’ve learned…
Your trading plan is just the tip of the iceberg. What you really need is a business plan.
After all, whether or not you are trading your own capital, if you call yourself a trader, you are effectively running your own business.
What goes into a good business plan? Though it may seem obvious, one of the most important items is knowing how you will fund your account.
That means calculating how much money you are taking in right now and figuring out how much you’ll want to dedicate to your trading.
My advice for any traders considering going the full-time route is to make sure you have at least six months of expenses saved and set aside. A full year would be even more ideal.
Step 2: Do the Legwork Before You Put on Your First Trade
The next step is doing the legwork before you put on a trade. Think of it like this…
Say you love cooking and your dream is to one day open your own restaurant. In this sense, you are like all retail traders who dream of making trading their main source of income. Here’s what I mean…
Before you can open your restaurant, you will need to experiment with different recipes. In other words, you’ll have to put together a product that will be viable in the marketplace.
But even once you’ve figured out your menu, you still have to consider the entire business aspect of your restaurant. You have to find a location, pay for that location somehow – maybe find an equity partner or a credit line – hire staff, buy equipment, etc.
In other words, you have to do an incredible amount of legwork before you can even think about opening up your restaurant for business.
Trading is no different. Just because you think you have a viable, backtested methodology, and you’ve successfully traded with it on a demo account, it does NOT mean you are ready to become a trader.
So what does it take to be ready? That brings us to the third and final step…
Step 3: Know Your Numbers
To be successful as a trader, you should have a proven methodology. But just as important, you must also know the numbers behind that methodology.
What is your strike rate? Your profit factor? Your expectancy – that is, the average amount you can expect to win or lose per trade with your system? On average, how many trades is a normal win-streak for your methodology? How about a losing streak? What is your risk of ruin?
These are all questions you must have answers to. Once you know the answers to these questions, you can analyze your trading during periods of extended wins or losses, and adjust things as needed.
The point is, there is a lot of work that goes into trading – beyond just trying to become a “good” trader. I’ve seen many traders have spurts of success flying by the seat of their pants. But eventually, they all blow their accounts.
The good news is, it is possible to make it in this business.
If you put in a lot of effort into the business-planning stage, you’ll build a solid foundation. From there, you can launch your trading career for long-term success.
Editor, Money Trends
P.S. At our Big Trades advisory, we do the hard work for you. Andy and I developed our methodology over more than three decades in the markets…. And this year, we set out to show an elite group of traders how to use it in their own portfolios. There’s still time for you to join us… Just click here to find out more.
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