Trading is a Business; Don’t be Undercapitalized

Once you step into live trading, the way you look at trading will never be the same.

It is now a business – YOUR business.

This means that you are the manager, and just like in any other business you have to have a business plan. You need to know what you’re going to do from beginning to end and how you’re going to react to any foreseen–and unforeseen–circumstances. As the saying goes, “If you fail to plan, then you’ve already planned to fail.”

So, what’s a great way to start having that business mindset?

One key business principle you need to understand is that it takes money to make money. Before jumping into trading, consider what kind of lifestyle you want as well as the possible costs you may incur (equipment, services, drawdown periods, etc.), because one of the biggest reasons why many traders and businessmen fail isn’t because they aren’t good, but because they are undercapitalized.

Being properly funded will allow you to sweat out periods of bad business (poor trading), and give you a higher chance of surviving long enough so that you may experience periods of good business (good trading). To give you an idea on how much you should put in, here are some important questions that you need to ask yourself:

  • Will you be trading full time or part time?
  • Will you make a living out of trading?
  • Will you be supporting your family or is it just you?
  • How are you going to be educated?
  • How much will you spend on trading tools such as charts and news feeds?
  • How much can you afford to lose?
  • Do you make money from being more right than wrong?
  • What is your average variability of returns on a per week or per month basis?
  • How big of a drawdown can you stomach?

After answering questions like these, then you can estimate how much you need to start with. Once you’ve decided on your initial capital and have begun your trading business, only then can you start growing it.

But of course, like any other business, you should only expand when you are already making money and successful. You don’t build a second McDonalds if your first one is still struggling to rake in profits!

These are all basic management principles, but they will be essential to setting the foundation of your trading career and business. So make sure you have both a solid trading plan and a business plan in place before you decide to get your feet wet and go live.

  • Pipmeastro2

    if trading is a business then why do people say dont take out a loan to trade.opening a business is just as risky as trading

    • Nihalbhat

      business more risky. cost of plant, building and labour, franchise fee in excess of 250,000 for some businesses

      • Ichitrader

        Having done both, I would consider that trading is FAR more risky than starting a business.  Yes you might have costs relating to plant, buildings and so on but these are items which can be sold if things don’t go to plan.  Equally, the business itself may have a value, even if it hasn’t been successful.  As a trader, once that money is gone, it’s gone. 

        Also learning to trade successfully is much harder than starting a business.  Two common statistics which are banded about are that 95% of new traders blow their account within 3 months (I can well believe it) and 50% of new business go broke within 2 years.

        Which one looks the higher risk?

        As for why you should never borrow money to trade – well the above stats should give you some clue but aside from that, any type of trading/investment should only be carried out with money you can afford to lose.  If you have to borrow the money, most would argue that you can’t really afford to lose it.  If you blow your account up in three months, do you really want to be spending the next 3/5 years repaying the loan?

  • Amog41389

    They do, its called leverage!

  • James McKee

    It is worth noting that different numbers mean different things to different people, this is especially true of dollar amounts.  One man’s fortune is another man’s meal for family and friends, and a level playing field is created through proper money management.

    So long as the maximum amount risked is equivalent to 2% of the traders capital there is (some) promise for the account to appreciate in value.  There is also the matter of the size of the position entered coupled with the leverage utilized, but it is vital that we all remember that exponential growth is a powerful tool.

    Even if you start out with $100.00 in an account, if you can even double that on a monthly basis (which would require FULL TIME trading) you would be set in just a year or two.  The crux of being under-capitalized (in my experience) is that the trader in question cannot adequately support themselves while building their capital.

    However, if you are able to live rent free (as a student, etc…) I could see great things for even a tiny initial account.  Once this is accomplished it is time to reconcile the fact that while the amount in your account might change, the percentages should (and in reality do) not.  Trading a $200.00 position at 2% with a $20.00 stop loss is one thing, but trading a $1000.00 position with $200.00 stop can really make people do screwy things.

    I suppose what I’m trying to say is that so long as your environment allows you to trade full time without having to use your profits for living expenses, and so long as a trader can maintain a sound system despite increasing positions I don’t see a problem with a small account.

    • Schnitzel

      That’s true… but small accounts often have the problem that your trades don’t even apply with the 2% risk rule. For example, if you deposit $500 and you trade with stop loss of 100 Pips with Microlots, then (for $ currencies) you have a 10$ maximum loss, which is exactly 2%. But if you suffer a drawdown and fall below 500$, you don’t have enough money to trade with 100 pips stop loss and 2% risk at the same time. So smaller accounts mean smaller trades to keep the 2% risk percentage since you can not adjust your positionsizes anymore, because you’re already at the minimum.

    • Pipmeastro2

      doubling your account is possible if you can make one or 2 bite sized trades per day which is what i plan to do. 

  • Teddyj0406

    I completely disagree. I think that a new trader needs to work with a small real account at first. Only a fool would follow this advice. Novice traders should stick to small accounts. Once the trader becomes more experienced with handling the emotional part of trading, and becomes profitable on a small account, then and only then should they increase their trading account.

  • wirabayu06

    i’ll take ur advice all.. thank u ^.^

  • budrey baker

    That are the very nice thing to know in business trading. You are not just having a lot of money to finance your business but also the skill and knowledge.

  • Greg Kozma

    The problem I see with small accounts is that if you risk 2% your gains will be a measly amount and people sooner or later are gonna bet more than 2% because making, say, 3 pounds on a trade is not gonna be worth it.

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