Wednesday, November 28, 2012

Trading In Stocks Is Like Running A Business

Trading can be mastered if you concentrate your efforts on how you will react to price rather than desiring to predict it. Reacting is a business decision, predicting is an ego play. Traders want to make money. Losses in the long run don't matter. Forecasters (prophets) want to be right (ego). And that's all that they are concerned about. Don't decide anything (ego), let the market do that job for you (business). Like any other business you have a business plan and the financial portion of that plan is the most important.

In this business your inventory is stocks, bonds, futures or options. Like any other business you define what an acceptable loss is on an item and what is an acceptable profit for the risk undertaken. Like any other business if the item of inventory doesn't do what you expected it to do, you put it on sale and liquidate it to raise capital to purchase inventory that will do what you want it to do. Your acceptable loss is your stop. Your money management system tells you how much that is. Your mark up is dependent upon your trading system and trading style.
It doesn't make any difference if you are a day trader or an investor. Like any business, some turn their inventory 10 times a day, some 20 times a year and some only twice a year. Your trading style and inventory volatility will tell you what your turnover rate will be. Trading is a business and if you treat it as anything else you will be a loser.