Forex Trading Articles - The Business of Trading

The Business of Trading

Oct 18 • Forex Trading Articles • 1047 Views • Comments Off on The Business of Trading

There’s a comedian in the UK called Frank Skinner, he tells a great story of walking through London’s China Town one late summer evening. Amongst all the restaurants he sees a sign in the window of a boarded up shop, the sign is for a new Chinese restaurant, “New Chinese restaurant opening Autumn!!”. He chuckles to himself thinking what sage came up with that eureka ‘light bulb’ moment to decide; “d’ya know what this town could really do with…?”

There’s been a late revival of sorts on many town high streets in the UK. This follows the pattern in the USA where many newly unemployed folk have decided to give self employment a go given their employment opportunities are limited. Many in the UK have chosen to set up niche retail businesses. In my town it’s hairdressers that appear to be breeding onto the high street, we must have at least ten, four new ones in the past twelve months. As I walked past the latest addition, (empty of customers in what are still recessionary times), I wondered what the set up cost was, the over heads, the employment liabilities, the lease term and obligations, the break even figure? Ignoring all other factors I imagine that the set up cost alone, before the cash register even rings, must be in the region of £50k…

Self employed traders can be forgiven for forgetting they’re actually involved in the day to day running of a business. It’s also quite easy to over look the benefits of being in our business over and above some other self employment options that may be out there. From time to time it may be worth taking time out to take stock of the huge benefits of being a self employed trader, a particularly useful exercise if you’ve had a poor trading day. There are obvious life style benefits to trading; the hours you get to choose, the freedom, the creativity, the independence, but trading actually stacks up very favourably compared to other self employed professions..

Most new businesses fail, they fail “period” to use our American cousins’ vernacular. The attrition rate is quite scary when you “do the math”. Over half of new businesses fail in the first two years, circa seventy five percent of new retailers since 2007. The reasons range from; lack of knowledge of the sector, under capitalisation, poor decision making, poor recruitment policy, lack of cash control leading to initial over spending, under estimation of start up costs and an overall a lack of clear strategy and vision for the new start company.

Most new starts only begin break even in year three and the average ‘burn rate’ in the UK for a small new start business to finally break even is circa £75k. There are exceptions and without any trace of irony the exceptional businesses are the rule and mould breaking ones, typically the ‘kitchen table start ups’ for less than £5K who then go onto become household brands etc..

It’s worth isolating some of these failure reasons and making a direct comparison with setting yourself up to be a trader to then realise after careful consideration what an incredible starting edge we can award ourselves.

Lack of sector or industry knowledge and experience
Most new self employed traders discover trading by accident as opposed to design. Once discovered the vast majority will research the subject extensively before committing significant start up funds to the new venture. Many traders will initially trade part time, building up their confidence (and perhaps account balance) before finally taking the plunge. Whilst they might be ‘chomping on the bit’ to enter the race new traders can take their time whilst learning their new craft. They can trade using many end of day strategies and swing or position trade a small account until they feel they’re ready. They could take perhaps up to two years to reach a point were they believe their market knowledge and practice masks them ready. In summary there is no reason why lack of knowledge or practice should be a barrier to a new trader’s success and this knowledge and practice can be obtained free of charge and as most know trading ‘knowledge’ is a constant on going evolution.

Under capitalisation, poor estimation of start up costs, lack of basic cash control and employment policy
There can be no excuses in our industry for lack of capitalisation, you can trade forex with accounts sub $500 dollars on incredibly sophisticated platforms offering spreads of one pip or less. New traders should never obligate more than a similar sum to any new platform they try. The initial objective should be to make this small amount last as long as possible having taken a reasonable amount of trades in order to test out various strategies. You could risk $10 dollars per trade, 2% on a single security such as EUR/USD and you’d have to experience a series of fifty straight losers to wipe yourself out if sticking to $10 per trade and not exactly 2% per trade. If position trading this would take approximately a year (although at ten cents per pip 100 pip stops may be too restrictive for position trading). Rather than look upon the negative aspect of technically this being a 100% account wipe out consider it another way; how many other businesses could start up and lose only $500 in their first year of trading and have fully traded for that year? In any other industry your $500 loss would be looked upon as success.

Once you are proficient and consistently profitable you can commit more funds to your next account or the ‘remnants’ of your first account. You are then injecting further capital into your business from a position of; market knowledge, experience and proof of success, any business mentor would applaud such a level headed approach.

 

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In terms of re-capitalisation this is were traders also have huge advantages over and above other business ventures. Firstly work out what would represent a reasonable salary and then realistically calculate what account size you’d need to achieve that salary. For example do you think you could grow your account by 0.5% per day? That would be roughly 10% per month. Now ignoring that 120% per annum would be a return that hedge fund managers would kill for let’s wind this ambition back to the 0.5% return per day which reads like a sensible ambition. Would £2k per month be a reasonable salary when first starting out as a full time dedicated trader? Bear in mind that in the UK the first ten could be free of tax and you may be able to offset certain expenses. Therefore in order to aim for the average UK salary you’d need a £20k account.

Your overheads are negligible; charts, accounts, a basic PC, internet connection and your employment responsibilities are only to yourself. Even your basic accounting procedures are simple; you get free trade recording packages from your broker in terms of a detailed account history at the click of a mouse.

Poor decision making, lack of clear objectives and vision
How many businesses can start the day knowing exactly what their fixed and arguably floating costs will be and absolutely draw a line under what the maximum loss the business can lose on any given day? We have that ‘luxury’ and it’s worth concentrating on this benefit when you inevitably have losing days.

Using our twenty thousand sterling account size example we can set daily losses on our account. We can limit our loss to perhaps 5% per day, or a certain percentage each week, or each month. You could even decide that a fixed percentage loss would result in ceasing trading for a period of time, perhaps If your account loses 20% you’ll take time out to assess your strategy and re-start with less position size. If you lose 40% in total after a set period you may consider ceasing trading altogether. Once again these are logistical steps we can put in place for our business that most other businesses can’t, and what’s best is that we can adjust our loss and tolerance parameters on a daily basis as the business evolves – we can put steps in place daily to remedy any glaring faults we clearly see.

Using our standard set up model, vis a vis ‘normal businesses’ there are other clear advantages we have. Most small new starts are retail or media/services, as mentioned earlier they require a ‘sink’ and or burn of circa £75k and even then up to 75% will not get into year three trading. We require £20k to be in business, (or less depending on the level of risk you believe your edge and psyche can tolerate) and can set losing parameters to decide for you that, despite it’s attraction, you and trading simply don’t mix. The worst case damage limitation scenario being that you lose £8k, some pride but have gone to every effort to be successful. If you close your business down there’s no employees to break the news to, no suppliers to let down, no lease to extricate from. Indirectly we’ve also created a business plan during this essay, but critically without the expense of a sales and marketing plan that normally eats up a lot of the start up capital of any new business.

It’s always a good time to start trading the markets, but if you are considering entering this business there really is no time like the present. The cost of doing business, (the spreads), have never been better. The educational resources (free of charge) are outstanding, the platforms are incredibly robust and intuitive, the innovations come thick and fast from brokers who want to see their customers succeed and will only charge you a single percent on most transactions. But unlike other businesses the barriers to entry are non-existent, and the skill set you acquire could continue to offer up rewards over a lifetime of investing even if you eventually decide full time trading is not for you.

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