015 - Some of Brian's Thoughts on Trading as a Business

Hello and welcome to the Consistent Profits podcast brought to you by Inside out trading and Brian McAvoy where the focus is on consistency because when you have the consistent part down, profits become easy. Hi, Brian McAvoy here with Inside Out Trading and today we're going to take a little break from the interviews because I wanted to talk about a particular topic I've been getting asked a lot about lately and I think it's just kind of cool that it seems to be on everybody's mind as far as, you know, being able to treat trading as a business and actually, you know, see it as business. How do you actually treat it as a business? Because, you know, I've been working with a lot of people lately who they're, they really do want to get away from their day job and, and focus their full time attention on trading and have it be their sole source of income and just live the trader life. Some want to travel, some just want to have it so they got plenty of control over their time at home. Maybe they got young kids and they want to have more time available for the personal interest, but also to be available to go to school with kids, after school activities, all that kind of stuff. Maybe coach the little league teams, that kind of stuff, which is what I did and it really is cool. But yeah, there are certain considerations about it. Cause a lot of times when people, when they first get into trading, they're just seeing it as a way to make money and they're not necessarily looking at it as a full time occupation or not even necessarily full time, but this is like their main source of income and their main occupation. So there are some certain considerations about it. I mean, here's a couple of the questions that I've gotten lately. One of them was, well, as far as how do you handle, you know, having trading as your income and not have it affect you financially, you know, pressure wise when you're trading just because you know that can influence your trading cause you to make a lot of mistakes, which is very true. And the way you handle that, again, just like with any other business, if you're running your business extremely lean and you start under capitalized, one of the big risks there is that yes, you're existing basically hand to mouth every month and that brings financial pressure, short term decisions, bad decisions, all that kind of stuff. So one of the key things is before you strike out on your own, you know, as far as, you know, trading for your, for your living, one of the things you want to make sure of is that you have at an absolute minimum six months worth of living expenses in the bank and reserves. And it's just there. It's not, you know, and it's out. It's there just to, to make sure that yeah, even if you make zero money with your trading, you can still pay your bills and live comfortably. You're not at risk of losing your property, losing your house, that kind of stuff. And so that right there is one of the key things is making sure that, yes, you are properly capitalized for that, that you have a really good reserve to survive any down spells or dry spells, whatever you want to call them. That's one of the first key things. The other one really is just plain looking at it, just looking at your trading instead of looking at it as a side or, you know, just a way to pick up some extra money is to really view it and look at it the same as you would with any other business you might start. I mean, if you look at your trading as, you know, just this fun thing you're going to do to make money and it's cool and it's rogue and it's rebel and all that kind of stuff, you wouldn't do that with a regular business. I mean, let's say for example, you wanted to, you know, open up a restaurant. Well, you wouldn't just, you know, set up a kitchen and start cooking and open the doors. No, you would actually plan it out and go through all, you know, think it all the way through. And this is absolutely critical. I mean you can, you'd be amazed how many businesses have been around for five, 10, even 15 years. And they're decent sized businesses. You know, they're seven figures plus, got employees, whole nine yards and well established and the, the owners are struggling. They, they're working their butts off, you know, 60, 80, 100 hours a week and making probably less than anybody else in the. It's ironic, but the way a lot of these businesses get, you know, wind up that way is because people just kind of start doing the thing, whatever it is, and you know, it grows and they continue growing it and you know, it becomes their full time occupation. But they never took the time and nor do they take the time to really settle down and get organized. I mean, that's one of the things I found really wild in business consulting that I've done over the last three plus decades. How many businesses have never even once been in business for over 10 years? How many businesses have never sat down and actually drawn up a business plan? I mean, of course, you know, they do their budget, but that's not the same thing. Budget and business plan are not the same thing. And there are so many businesses that they're really, they're more or less just flying by the seat of the pants and making lots of mistakes because they never sat down. And the advantage to the business plan is thinking it through on a longer scale than just the next 30 to 90 days. And so if you do the same thing with your trading or yeah, you actually think it through, where. Yes, okay, you know, this is where I want to be in three years or five years or maybe even 10 years. You don't have to go out that far. But anyway, you know, anywhere from one to five years and you lay out an actual plan for it, a business plan with financial considerations in mind, not just make a lot of money. I mean, it's funny, I was talking with this one guy came to me, this was several years ago, but it cracked me up because it was young guy, retired at like 30, you know, late 30s and wanted to trade and he was able to retire young because he had started a couple of companies very successfully and retired from those and he wanted to trade. And I said, okay, so what's your plan for your trading? You know, do you, have you written up a business plan? He goes, yeah, I just want to make a lot of money. It just blew me away because he had the savvy and the experience, but he just wasn't looking at his trading as the business that it is. And so that's one of the really is a key thing is you sit down and you think it through and there is a thought process for it. Because if you think about it with your trading, this is a brand new company that you're starting up and it is a startup. And there are considerations that go with startups. There are learning cycles, learning phases that go with the different aspects of the business. There's the revenue and capital size and allocations and all that kind of stuff. So you have the financial and the activity wise and the developmental stages that a business goes through. And the benefit, really the biggest benefit in the business planning. I mean the business plan itself is extremely cool and very useful. But the planning process itself is massive. Just in the thinking everything through makes all the difference in the world and it can save you a ton of headaches and years of wasted time and lost money and just stress and all kinds of horrible things. So now as far as, you know, looking at your trading as a business, one of the other perspectives that I got asked about is you know, one guy I'm working with, he's, he's got one strategy and he's like, you know, should I, you know, should I bother looking for, you know, another strategy? And I'm like, well, yeah, actually, I mean, the choice is yours, of course. But I find this metaphor very helpful. If you look at your trading kind of like you run a department store and say, okay, so you know, you want to, you know, you've been trading stocks for a long time, you got your stock portfolio and some of it's just buy and hold long term investors, but some of it's been trading and somewhere along the way you got interested in forex and you know, maybe over here, you know, you're into crypto and stuff like that or futures. And the thing is, if you look at your trading as, okay, now I've got a department store and these are my different departments and within each of those departments I'm going to have different product lines or in the case of trading it'll be different strategies and, or things that you trade. And so each of your departments is going to contribute a certain amount toward your revenues and, you know, your bottom line, none of them 100%. And again, within each department you've got your individual product lines. And the thing is, it's really important that you keep all this organized just like you would in a real business. And again, the department store metaphor is helpful because if you're trading stocks in forex and futures and you're spreading yourself across those, well, yeah, you need to be paying close attention to it. How is each of them performing? What kind of capital requirements? How much of my working capital is each of them taking up? Again, just like you would with a business. And you want to be able to track your individual things within each department. So just like, you know, let's say you're a department store, one of your departments is shoes. Well, you want to know if you, even if the department is doing decently, you may have, you know, certain lines of shoes that are not making money, that may be actually even losing you money. And just because the department is showing a profit doesn't mean that you want to accept the losses. So it's important to track everything individually. The same thing with your trading. You want to be tracking the performance of your individual strategies and the individual things that you trade within each department and then tracking each department so that, yeah, you're going to look at, you know, your bottom line for the whole store for every month. But you also know individually, you know, within each Department. And for each of your strategies and instruments that you're trading, yes, each of them is performing satisfactorily. And if it's not, then you can, you know, put the attention there, decide, you know, do I want to fix it? How am I going to fix it? Is it worth fixing? And so am I going to continue with it or am I going to drop it, Maybe replace it with some something else? Or again, like with the guy that was asking me about, you know, adding something? Well, yeah, if you're going to add something, well, understand it's going to tie up your time, it's going to tie up your energy, it's going to take a certain amount of your trading capital. Even though it might, you know, be adding something to your revenue, it may also be taking away from revenue that you already have. And so that's another consideration. When I used to be manufacturing, one of our customers was Pepsi. And whenever they would launch a new product, they were aware of the fact that, okay, it's not just going to generate new sales, it might also be taking sales from, from some of our existing products. And the same thing goes with your trading. So as you expand and you're wanting to do more and more and more, it's cool to expand, but you have to understand you may be taking away from something that's already, you know, contributing to your revenues and your, and your bottom line. And again, it's going to be taking up energy and resources, capital, all that kind of stuff. Now, right along with the allocation of resources of capital and the business plan. One of the critical things, and I find it funny that there's this real simple truth about trading that would solve a lot of problems for a lot of traders if they would just go ahead and make use of this. Is the question, okay, how much is reasonable for me to expect to make with my trading? And I've gotten in arguments with people online, you know, where they're saying, oh, if you're making more than 2% as a trader, you know, you're lying. And it's like, no, the truth about trading and the money of trading is as simple as this. How much you can make really is not a set limit on your account. It's not, you know, because there's some people thinking, oh, my God, you know, if you're going to talk about doubling your account, you know, in a month, you're crazy. Which is not true. I've done it. I know lots of. I have friends who've done it, do it on a regular basis. But One buddy of mine, that's one fun game that he plays just by himself, was how fast can he double an account? And I think his record so far is 22 days where he doubles it. He doubled his account in 22 days. And here's the whole key to it, the numbers of trading. Since we're talking about trading as a business, it's the same as it is for a business. How much money can you make in any given business? Well, same thing for your trading. Two factors. How many transactions are you processing in a month? What's the size of the transaction? So it's two things and that's it. So if you're only placing, you know, one or two transactions a month and you're wanting to make a certain percent on your account, well, those trades need to be pretty sizable in order for you to yield that kind of percentage. But if, let's say, let's say you have a ten thousand dollar account and you're wanting to, you know, yeah, make a killer ROI, let's say, you know, 20%, two grand a month, is that realistic? Well, gosh, two grand a month and you have $10,000 to play with. Well, really, all you have to do to make $2,000 a month, let's say making, you know, $50 a trade net, you know, that's your average, your expectancy, your average return per trade. If you're averaging 50 bucks on every trade, well, 40 trades, there's your 2 grand right there. And so that's the whole key is, are you getting in enough trades? They don't have to be huge if you're getting a lot of them. And if you think about it, you've heard of this hft, high frequency trading. They're operating on the same principle. They're not looking to make, you know, a million dollars in every trade. They're making small trades, but they're making a ton of them every month, every day. And that's why they can just kill it with the market, you know, with the markets and just rake in a ton of money because they're getting in so many trades. They don't have to be big so long as, you know, they've got their, the numbers are right, they're profitable and, and they're placing a ton of trades. They can make a ton of money. So can you. So as far as, you know, limiting your thinking, oh, I can only make, you know, 4% on my account or, you know, 4% is too aggressive on my account. No, it all depends on how often you're Placing your trades, you know, how many trades can you place in a month and the size of those trades and the size of your average return, I should say. So really, that's all there is to it. And that's one of the things that's really cool about trading as a business. This is one of those big considerations. But it's that simple. It really is. So if you're trading a 5 or 10 or you know, $50,000 account and you want to make an aggressive ROI, cool. Just look, you know, look at the number of trades that your strategy or your system provides you, how many opportunities and is that going to be sufficient to make your goals? And if not, again, okay, maybe I've got this strategy and it, you know, get me this many trades per month. Well, I want to make more than that. So yeah, now you look at another strategy. So you add to your possible trades, your possible revenue sources and then you just have to balance it out. Okay. Are these going to be interfering with each other? I'm going to be able to, you know, allocate the resources and the time and the capital, each of these to trade two or more. And if so, then cool. So anyway, I mean that's really, they're all there is to it. But from a business perspective, yeah, if you want to expand, cool. Just understand it's going to take, you know, an allocation of resources and then you can add revenues. Hopefully they're not going to cannibalize on what you've already got going on and you know, taking away from what you already, what you already have established. So those are some of the considerations, some of the perspectives of looking at your trading as a business. And you always want to keep a long term perspective in it and understand, yes, this is the long game. We're not playing the short game. Of course we want to do well this, you know, this month and this quarter. But we're in, we're in this for the, you know, we're playing the infinite game assignment assignments and eclipse, where yeah, the primary purpose is to survive and to stay in the game. And so that's always one of the underlying thought processes that go with this business. So anyway, hope this has been helpful if it has and you'd like to, you know, hear some other perspectives about trading as a business. There's a link down in the description down below for a presentation that covers other aspects of trading as a business and it's so named trading as your business. But anyway, this video a pretty short while back and I think you'll enjoy it. It's about 20 minute video and it's just, you know, it's, it's just a regular presentation. It's not a big pitch. So, yeah, check out that link. I think you'll enjoy it. And other than that, I hope you have a great week. We'll see you next week on the Consistent Profits podcast. Cheers. Thank you for joining us today on the Consistent Profits podcast, brought to you by Inside Out Trading. Make sure to swing by Inside Out Trading and pick up your copy of the proven formula for consistent monthly profits. If you enjoyed the show, make sure to subscribe on your favorite channel and we'll see you on the next episode. Cheers.