Business Plan

Before diving into the world of trading, it’s essential to have a well-thought-out business plan, especially if you’re planning to make trading your full-time occupation. This plan should address several critical questions, such as:

1. How much capital do I need?
2. What will be my expected annual rate of return?
3. How much can I afford to lose?
4. What will be my maximum drawdown, and what is my expected average drawdown?

These are just a few of the many questions that need to be considered. You also need to account for other factors like execution costs, potential downtime due to computer or hardware malfunctions, and more. Without a comprehensive business plan, even a minor setback could cause you to abandon your strategy, leading to erratic and emotionally driven trading decisions.

Many traders have grand visions of making substantial profits but often neglect to perform the basic calculations to see if their goals are realistic given their resources and skills. The following are simple, broad estimates to encourage you to think critically about these issues. While they are not precise and can’t account for all variables, they serve as a starting point.

If you’re planning to trade full-time, you’ll need to generate enough income to replace a regular salary. For some, this might mean earning 1000,000 per year, while others may aim for 25,00,000 or more. While top hedge funds may generate annual returns of 20-25%, the truly exceptional ones can achieve 40-80% per year over extended periods, given the right conditions. However, market volatility is beyond your control, and your returns will depend on what the market offers. Still, aiming for a 25% annual return is a reasonable benchmark if you intend to trade for a living.

It’s important to distinguish between investing and trading. Investing often involves buying and holding assets for significant returns over time, perhaps with a few “home runs” from high-growth stocks. However, these returns aren’t consistent on a weekly or monthly basis. Professional trading, on the other hand, requires strategies that generate profits almost daily and consistently across most weeks of the month. This level of consistency demands a trading style that’s fundamentally different from long-term investing. As a professional trader, you can’t afford to ignore losses for weeks at a time, hoping they’ll reverse in the long run, especially when you have bills to pay every month.

The mental challenges of trading are considerable. Much like a quick-draw shooter in a high-stakes showdown, the psychological pressure in trading is intense and far different from what’s described in textbooks. Your trading strategies need to be so reliable that your subconscious mind won’t panic or cause you to deviate from your plan in critical moments.

The key to surviving and thriving in trading is following the trend. I knew that by consistently winning more than I lost and avoiding significant losses on any single trade, I could continue to survive and prosper. But the reality is that many traders struggle to accept losses. They come up with psychological justifications for trading against the trend and often feel ashamed of taking a loss, seeing it as an admission of failure. However, it’s crucial to understand that you’ll be making hundreds, if not thousands, of trades each month, and many of these will result in losses. The important thing is to take small, quick losses so you can regroup and continue pursuing profits. The old adage, “When in doubt, get out,” is especially relevant to day trading.