If there’s one thing we tend to forget about trading, especially in the early stages of our journey, is that trading is actually a business. Therefore, it needs to be treated like one.
The primary purpose of a business is to make a profit, and calculating profit is pretty simple:
Profit = Income － Expenses
As a trader, your main source of income is trading profits. Your primary expense is your trading losses. In addition, there are additional expenses you have to consider: Books, courses, charting software, etc. But these expenses are more related to setup costs and aren’t always ongoing.
To make a profit, your income needs to be higher than expenses and profits need to be bigger than losses. So you can either increase income or reduce expenses. Better yet, do both.
There’s always some cost
When attempting to reduce losses (costs) don’t try and eliminate them as they are a natural part of the trading process. Trying to eliminate losses leads to a different kind of problem, and that is believing there’s no risk in a trade. This type of thinking can cause one to bet the farm on a single trade. Rather limit the size of your losses with a stop loss and/or position size.
When it comes to profit, you want to maximise what you make when you find yourself on the right side of the trade (without being greedy). You do this so that your income has an easier time beating expenses.
For any business to function properly, the individual(s) running that business also need to be good at other aspects of the business, like admin and ensuring the business’s books are in order, etc. The same applies to trading. A trader needs to be good at admin and needs a journal for thoughts, trade logs, statistics, etc. This will help them understand whether their trading is doing well (or not).
There are 5 possible outcomes to every trade. If you manage to keep out the significant losses, your business is sure to survive. And if you let in the big winners every now and then, your business is sure to succeed.
Last and perhaps most importantly, it’s important to remember that trading isn’t personal – it’s simply business.
Traders share a peculiar characteristic: they’re fiercely competitive, but only with themselves. In practice this means that they see every outcome as an opportunity to learn, and they’re brutally honest about both their failures and successes. This also means that they’re hungry for knowledge. They don’t sleep easy with unanswered questions. And they’re seldom satisfied with just one answer.
Njabulo Nsibande is a founder of Village Trader, and Sakha Ingcebo investment club. His interest in trading began in 2016, alongside a rash of Instagram ‘fx traders’…
Find him on Twitter: @njabulo_goje.