Trading Business 101

Nearly every good trading book has an introductory chapter that includes something like the following:

• Traders are entrepreneurs, they need to approach trading as though they were running their own business, because they are.
• Trading must be treated like you are a self-employed entrepreneur. You must get off the employee mindset.
• When you trade you must act like you are in a business. Every good business has a risk management program. If they don’t, they will soon be out of business.

Therein lies the problem. The trader reads these recommendations and then proceeds forward in trading, outside a business structure, and generally wreaks havoc upon their accounts. My trading friends, acting like you are in a business is different from being in one.

Reading through my business trading tax forms annually provides some great insights on how your trading business is doing. Are you profitable after all expenses? Many traders claim they are positive every year. See, my trading platform’s profit and loss is positive, they say. But what if we add in the expenses of trading? Looking at your tax returns comparatively year after year provides clear insight into the health of your business. Do you even know what your trading net income was annually over the last few years?

Most traders are technicians lacking an entrepreneurial backbone.

Michael Gerber, author of the E-Myth series of books, once said that most business owners are technicians suffering from an entrepreneurial seizure.  Going one step ahead with traders, I’ve concluded the following: Most traders are technicians lacking an entrepreneurial backbone. Instead of working on their business, they continue daily to enter trades, not seeing the big picture and becoming a business owner like they should.

The IRS will only allow you to claim losses on your business for three out of five tax years. If you don’t show that your business is starting to make a profit, then the IRS can prohibit you from claiming your business losses on your taxes. Traders should take that advice. If you are not profitable, after all expenses year after year, it’s time to move on to something else or make some radical changes.

If you have yet to explore how to establish your own trading company and really become a business, consider my book The Business of Trading. It’s the only book on the market telling you everything you need to know about starting your own trading business.

Enuf said.