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Even if you're not ready to start a trading business, you should still trade like a business. For those of you that are ready, I teach you how to trade as a business.
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00:00 Introduction
00:30 How to Trade Like a Business
00:57 Trading Losses are Expenses
01:20 Trade With an Edge
02:09 Preserve Your Capital
03:18 Why Are You Trading?
03:45 What’s Your Market Philosophy?
04:20 What Are Your Principles?
04:55 What Are Trading Company Rules?
06:09 Risk Management Rules
07:17 Position Sizing Rules
08:00 Leverage Trading Rules
09:00 SWAT Analysis
09:17 Strengths
09:43 Weaknesses
10:01 Record Your Negative Triggers
10:32 Opportunities
11:06 Threats
11:25 Performance Management
12:00 General Performance Metrics
12:20 Understand Your Fixed & Variable Costs
13:47 Office Location Considerations
14:42 Benefits of Incorporating
15:45 Tax Trader Status
16:25 Tax Trader Status Guidelines
Website: https://analyzingalpha.com
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0:00
if you want to make more money in the
0:01
markets you need to trade like a
0:03
business and for those of you that are
0:05
ready i teach you how to do exactly that
0:07
create your very own trading business in
0:09
this video you might say leo i'm not
0:11
ready to go full time well that's okay
0:13
you should still stick around because i
0:14
include a lot of trading tidbits that
0:16
you're going to be hard pressed to find
0:17
elsewhere now if you're ready to take
0:19
that leap you should watch these five
0:21
critical questions that you need to
0:22
answer before starting your own trading
0:24
business or trading regardless and with
0:27
that out of the way let's talk about
0:29
what it means to trade like a business
0:32
understanding a trading business
0:33
involves a solid grasp of how a trading
0:35
business functions and is structured to
0:37
achieve an overall ideal outcome for the
0:39
business owner although different from a
0:41
traditional brick and mortar business
0:43
that trading businesses anatomy can be
0:45
broken down similarly think of your
0:47
trading strategies as your new products
0:49
and services for it is through these
0:51
strategies that you'll be generating
0:53
your trading income sure they will not
0:54
be fail proof which leads me to my next
0:56
point
0:58
trading losses are expenses trading
1:00
losses are going to be inevitable you
1:02
want to take advantage of these losses
1:04
to improve your trading don't just beat
1:06
yourself up over them right they're a
1:07
learning opportunity you want to make
1:09
sure you analyze each loss and learn
1:11
from them they can be your best teacher
1:13
but at the same time you also want to
1:15
simply treat your losses as a cost of
1:16
doing business let's think of the casino
1:19
and the game of roulette
1:21
now of course the casino business makes
1:23
money when the player loses but does the
1:25
player always lose no
1:26
so if we have a player who is always
1:28
betting on the color red they have an
1:30
almost 50 50 chance of winning each time
1:33
there will be times when the player hits
1:34
lots of reds in the short run and the
1:36
casino loses money however the house
1:39
always wins you know in the long run
1:41
given that the roulette wheel contains a
1:43
neutrally colored zero the casino has an
1:46
edge and if you watch that video i told
1:47
you to watch previously you'll know what
1:50
an edge is right and that's extremely
1:52
important because that edge gives the
1:54
casino advantage over the player so in
1:56
other words act like a casino if you
1:59
have an edge in the financial markets
2:00
you're going to win long term short term
2:03
losses are simply a cost of conducting
2:05
business
2:07
and speaking of losses it's time to talk
2:09
about capital preservation capital
2:11
preservation aims to protect one's money
2:13
and safeguard one's business against
2:15
losses in trading it's the same thing
2:17
preserving your working capital to live
2:19
another day is more important than
2:21
making money in the short term new
2:23
traders often have this backwards the
2:25
truth is that the only aspect of the
2:27
trading process that you have
2:28
significant control over is how much
2:30
money you're willing to lose in a trade
2:32
so it's critical to size your bets
2:34
accordingly the training business plan
2:36
similar to a typical business plan is a
2:38
document that details everything that
2:40
you need to know to run your trading
2:41
business it includes your objectives how
2:43
you intend to make money your edge or
2:45
preferably edges and what you'll trade
2:47
and why and how you'll grow your
2:49
business it's time to address the actual
2:51
birth of your business as a new
2:52
independent trader now what's your
2:55
company's mission statement this is
2:56
important it's just not some fluffy
2:58
thing that you post on a wall a
3:00
company's mission statement defines its
3:02
culture values ethics fundamental goals
3:04
and agenda why are you doing this is it
3:06
just for the money if it's just the for
3:08
the money you might not have the staying
3:09
power you know what's your driving
3:11
purpose for embarking on a training
3:12
career let me tell you it's probably one
3:15
of the hardest careers with the highest
3:17
fail rate and if you don't absolutely
3:19
love it and kind of weird and just have
3:20
this
3:21
you know pursuit to try to figure out
3:23
the markets it's going to be tough for
3:25
you to stick with it so it's critical to
3:27
understand the why before the how now
3:30
what's your company's philosophy a
3:32
philosophy refers to the way things have
3:34
done around here conventionally it
3:35
relates to the fundamental beliefs of a
3:37
people or organization your company's
3:40
philosophy boils down to your market
3:42
beliefs before you can trade you need to
3:44
have a philosophy about the markets do
3:46
you believe that the markets are
3:48
fundamentals or emotions drive the
3:50
market is the fed the thing that moves
3:52
the market your trading edges come from
3:54
a deep understanding of how you view the
3:56
market and you need this deep
3:58
understanding to stick to your trading
4:00
strategies during a market drawdown what
4:02
is your market philosophy these will
4:05
guide your principles so what are your
4:07
company principles company principles
4:09
refer to the principles that your
4:11
company abides by through its day these
4:14
could be building a great workplace
4:15
culture conservative cash flow use or
4:17
taking big calculated risks
4:20
for instance if you believe the fed
4:21
moves the market are you selling your
4:23
positions if the fed's tightening right
4:25
if you're a trend follower do you
4:27
implement paul tudor jones rule of
4:29
refusing to purchase any stock that's
4:30
below its 200-day moving average having
4:33
these various principles aligned with
4:35
your market philosophy and mission will
4:37
help you maintain the necessary
4:38
discipline with your trading now we can
4:40
talk about your company rules now what
4:42
are company rules well obviously
4:44
everyone knows company rules refer to
4:46
the you know established rules a company
4:48
makes by a high level authority
4:49
typically management about how things
4:52
are conducted hours work etc and larger
4:54
trading organizations should definitely
4:56
define these however the rules i'm
4:58
referring to for a trading business help
5:00
you protect your capital and add
5:02
discipline to your trading operations to
5:04
boost profitability essentially money
5:06
management rules and there's quite a few
5:08
different varieties of these right the
5:10
first are your portfolio management
5:12
roles portfolio management entails
5:14
building and overseeing a selection of
5:16
investments or investment strategies
5:18
that meet long-term goals set above
5:20
now most investors take the approach of
5:22
diversifying their assets which is a
5:24
solid measure however a superior
5:26
alternative and this is one of those
5:28
tidbits is to implement uncorrelated
5:30
strategies within the same asset class
5:32
for instance buyers tend to reduce their
5:34
leverage during sell-offs which causes
5:36
both stocks and bonds to drop even
5:38
though these two these two asset classes
5:40
are generally uncorrelated
5:42
therefore having a mix of long and short
5:44
stock strategies can help you offset
5:46
this risk so what are your portfolio
5:48
men's rules for instance i never
5:50
allocate more than 25 percent of a
5:52
capital to a single uh to single to a
5:55
single algorithmic trading strategy so
5:57
that's just one of mine what are your
5:59
risk management rules well risk
6:00
management is a process of identifying
6:03
assessing and controlling threats to an
6:05
organization's capital and earnings
6:07
these risks stems from various sources
6:09
including financial uncertainties legal
6:11
liabilities technical technology issues
6:13
etc now remember that an aspect of
6:16
trading that you have considerable
6:18
control over is how much you're willing
6:19
to lose on any trade so always go in
6:21
with the trade knowing your predefined
6:23
price targets and take profits and the
6:26
price points at which you're willing to
6:27
get out of this for a small loss if the
6:29
trade goes against you
6:31
the worst thing that you can do is hold
6:32
on to a losing trade that invalidates
6:34
your thesis hoping it will eventually
6:36
become a winner don't do that even
6:38
though it's one of those psychological
6:39
biases you have to conquer and trade now
6:42
one of the risk management rules for my
6:44
breakout strategies is i never buy a
6:46
stock where the stop loss on that bar
6:49
will be larger than the average range or
6:51
the average daily range right so let's
6:53
just say here's the average candle is
6:56
this long if my stop loss is more than
6:58
that on that breakout meaning i have to
7:00
chase it i'm not going to do that so
7:02
there's also other types of rules too so
7:05
you need to know your position sizing
7:06
rules position sizing reverse to the
7:08
size of position within a particular
7:10
portfolio or the dollar amount you're
7:11
willing to trade investors utilize
7:13
position sizing to determine how many
7:15
units of a security they can purchase
7:17
which helps us control our risk and
7:19
maximize returns how much are you
7:21
willing to lose from your trades is
7:22
directly tied to the side size of your
7:24
trading positions so you typically want
7:27
to risk one percent or less on your
7:29
trading balance on any one trade and
7:31
keep in mind with proper position sizing
7:34
there is a risk that you know that the
7:36
position loses more than you know the
7:38
specified one percent if the stock gaps
7:40
down from an overnight session that's
7:42
why it's essential to size correctly
7:44
especially around earning announcements
7:47
now there's other rules too such as
7:49
leveraged trading rules you know
7:50
leveraged trading also known as margin
7:52
trading or margin finance is trading on
7:54
margin allows you to open a trading
7:56
position with a broker using only a
7:59
small amount of capital to make a much
8:00
larger position so maybe you have 10 000
8:03
on a 10x leveraged position you'll
8:06
actually be trading if you had 100 000.
8:08
so any capital gains that you make on
8:10
this will have an almost a you know
8:12
tenfold effect obviously the taxes but
8:14
the same applies to losses which is why
8:16
leverage implies an element of risk if
8:18
you're taking on leverage be sure to
8:20
make sure that your edges are well
8:22
defined and you have a clear leverage
8:24
rule so for instance one of my rules is
8:26
i never go about 500 leverage and this
8:28
scales down as the volatility of the
8:30
instrument increases and leverage is
8:32
extremely risky in all cases there's
8:33
actually one exception to this when
8:35
trading crypto leverage can help
8:37
mitigate the risk of an exchange hack at
8:39
the cost of margin interest facing
8:42
now it's time to move on to the next
8:43
part of our trading business plan and
8:45
that's to complete a swot analysis swat
8:47
stands for strengths weaknesses
8:49
opportunities and threats and so a swot
8:51
analysis is really just a technique for
8:53
assessing these four aspects of your
8:55
training business swot analysis is a
8:57
simple tool that can help analyze what
8:58
you're currently doing well and maybe
9:00
what you need to work on in the future
9:02
so that begs a question what are your
9:04
strengths you know strengths define what
9:05
you excel at perhaps you have a
9:07
programming background and you can
9:08
create trading algorithms or maybe
9:10
you're able to stay calm and collected
9:12
and perform well under pressure for me
9:14
as you probably guessed it's the first
9:16
one which helps mitigate my weaknesses i
9:18
actually
9:19
get bored easily and then i'm prone to
9:21
over trading which is something that the
9:24
algorithms help me solve now what are
9:26
your weaknesses well weaknesses prevent
9:28
you from operating at your you know
9:30
optimal level right for instance you may
9:33
have difficulty dealing with market
9:34
sell-offs and tend to get sucked in by
9:36
the emotion of everyone else panicking
9:38
the best way to mitigate this is to
9:40
re-read your business plan now keep in
9:42
mind that these sell-offs are often an
9:44
opportunity to market as they say one
9:46
man's misfortune is another man's
9:48
opportunity take note of your weaknesses
9:50
and your negative triggers that way you
9:52
might be able to easily spot them and
9:54
make logical decisions rather than
9:56
emotional irrational ones that hurt your
9:58
profitability i pay both my living and
10:00
business expenses for my trading income
10:02
in the early days i'd feel immense
10:04
pressure to make money every single day
10:06
and i would actually override my trading
10:08
systems right no one's perfect and i'm
10:10
sure you can all guess what happened now
10:12
we've got to talk about what are your
10:13
opportunities these refer to favorable
10:16
external factors to grow your business
10:18
or your competitive advantage for
10:19
instance if you only trade stocks and
10:21
your trading strategies can be applied
10:23
to additional trading instruments or
10:25
different markets trading crypto is an
10:28
attractive is attractive for an
10:30
algorithmic trader because it trades 24
10:32
7 against relatively unsophisticated
10:34
traders right so that was one of my
10:37
opportunities which uh you know i got
10:39
into now what are your threats so in
10:41
contrast opportunities threats refer to
10:43
factors that pose a possibility of
10:45
harming your trading business now
10:46
changes in capital gains laws or crypto
10:49
regulation or even black swan events are
10:51
threats you know basically you need to
10:53
make sure you have proper hedging
10:55
strategies in place now with all of the
10:57
swot analysis complete that you have
10:59
your understanding of you know what your
11:01
potential opportunities are maybe where
11:03
you should take your business next it's
11:05
time to talk about how you measure
11:06
performance there's a saying that what
11:08
gets measured gets improved and i've
11:09
generally found that to be true and like
11:12
other traditional businesses trading
11:13
businesses are no different to monitor
11:16
your trading performance you require the
11:17
data you can collect the data manually
11:19
from your trading platform and record it
11:21
in a spreadsheet but i highly recommend
11:23
discretionary traders use journaling
11:25
software that records the data for you
11:27
i'll go traders we've got it easy as as
11:30
we already know in regards to that right
11:33
now there are hundreds of metrics you
11:35
could track and you should track the
11:36
following at a bare minimum and i'll
11:39
leave these in the description below so
11:41
your profit and loss per trade total
11:43
number of trades win percentage average
11:45
time in the trade largest winning trade
11:47
largest losing trade average winner
11:49
average loser and maximum drawdown so
11:52
those are all the things that you want
11:53
to track at a bare minimum
11:55
and like other businesses we have costs
11:57
right we have fixed and variable costs
11:59
and you need to have an understanding of
12:01
these when thinking about whether or not
12:03
you want to embark on this journey so
12:04
there's two types primarily fixed costs
12:06
which are costs that remain constant for
12:09
a period of time irrespective of the
12:11
outputs and variable costs which are
12:13
expenses that change directly in
12:15
proportion to business activity in our
12:18
case trading right now what are some of
12:20
the examples of this so fixed costs are
12:22
you know like your computer and
12:23
equipment data feeds again for elder
12:26
traders that
12:27
can be more than you would think if
12:28
you're a new elder trader uh trading
12:31
software admin software such as you know
12:34
different accounting software things
12:36
like that
12:37
internet and telephone typically i
12:39
recommend having multiple ways to
12:41
connect to the internet the last thing
12:43
you want to do is be in a trade and the
12:44
internet goes down and your utilities so
12:47
the good news is you're most likely
12:49
already paying for the trading software
12:51
and a lot of the home expenses and most
12:54
of these are relatively inexpensive but
12:57
don't forget to consider the largest
12:58
expense of them all paying your managing
13:00
member and obviously that's you and to
13:04
understand your business's true
13:05
profitability you need to track your
13:07
monthly draw which is essentially your
13:09
salary you know in your accounting
13:11
software now the variable cost which can
13:13
also be significant and which we're
13:15
probably already familiar with are
13:17
transaction fees and slippage so i'm not
13:19
going to cover those because you i'm
13:20
sure already know and understand how
13:22
those affect your training now there's
13:24
another thing that we need to talk about
13:26
too is you know where's your office
13:27
location you know one aspect to think
13:30
about is it you know as a trader you can
13:32
set an office up anywhere across the
13:34
globe granted you've got some time zones
13:37
issues and some are more convenient than
13:38
others and you can set up in your own
13:40
home office or you can you know buy or
13:42
rent a business office you know a big
13:45
driver of this decision is how well you
13:47
can balance life and work while home if
13:49
you've got kiddos at home and can't
13:50
concentrate well the answer is typically
13:53
straightforward and you need to account
13:54
for that additionally you know scaling
13:56
to multiple employees is a little easier
13:58
if you're an algorithmic trader and you
14:00
can more easily separate roles but then
14:01
you'll definitely most likely need an
14:03
office or some type of remote work setup
14:06
now all of these aspects determine
14:08
whether it makes sense to stay at home
14:09
or hang up a shingle somewhere outside
14:11
of your personal space so regardless
14:13
where your office is you'll want to make
14:15
sure you're maximizing the tax benefits
14:17
so now we're going to talk about
14:19
benefits for incorporating and now i'm
14:21
not a lawyer so you know all of this is
14:23
gained through personal experience so if
14:25
you are interested in some of the tax
14:27
benefits and other benefits of
14:28
incorporating make sure you contact a
14:30
lawyer and accountant
14:32
with
14:32
experience setting up trading businesses
14:34
in your jurisdiction now so why would
14:37
you want to incorporate well you know
14:39
trading can create massive
14:41
tax liabilities on your operations
14:43
because
14:44
the sales of
14:45
assets are taxable income that is
14:48
considered capital gains right
14:50
additionally trading is not considered a
14:52
business activity by the irs so it's not
14:54
possible to deduct business expenses as
14:57
they are ineligible for tax deductions
14:59
in this case this is noteworthy since
15:01
you know costs such as software internet
15:02
access and data feeds can actually be
15:05
significant for many active traders but
15:08
you can receive similar tax treatment to
15:10
other business owners by creating a
15:11
separate business entity to conduct your
15:14
trading activities you know you can form
15:16
an
15:17
s-corp and then file for tts or trader
15:20
tax status which exempts you from the 3
15:23
000 capital loss limitation and wash
15:25
sale adjustments now there's multiple
15:27
different types of uh entities that you
15:30
could elect to create such as a single
15:32
member and llc and then elect s-corp
15:35
which has some benefits
15:37
but essentially again you're going to
15:39
want to talk to your lawyer and
15:40
accountant in regards to those but
15:43
basically long story short you can save
15:45
a significant amount of money by
15:47
electing for trader tax status and
15:49
trading under an entity before
15:52
incorporating a company ensure that you
15:54
qualify for tts while there's no
15:56
specific rule set we can look at prior
15:58
court cases to determine eligibility
16:00
guidelines as a trader you need at least
16:03
four trades per day and trade executions
16:06
on approximately four days out of five
16:08
per week and your average holding period
16:10
must be under 31 days and additional
16:12
factors include having a material
16:14
account trading size obviously above 25
16:17
000
16:18
pattern day trader designation and spend
16:20
over four hours per day with the
16:22
intention of running a business as a
16:24
trading business to make a living so
16:27
again like i said please keep in mind
16:29
i'm not a lawyer these are just the
16:31
things that i found during my trader
16:34
journey today we've covered much of what
16:35
you need to know for setting up your
16:37
very own training business obviously
16:39
includes a ton of stuff including the
16:41
high level of creating a business plan
16:42
and getting your goals and everything in
16:44
alignment to identifying multiple edges
16:46
to execution to even you know
16:48
incorporating a legal entity so
16:51
hopefully you found this video valuable
16:52
if you did please let me know in the
16:54
comments actually if you didn't find it
16:56
valuable let me know too this is a new
16:58
type of video for me most of the ones
17:00
that i create are you know involved back
17:01
testing and maybe if i should just stick
17:03
to that let me know but if you did like
17:05
the video please subscribe and
17:08
share with your friends because it lets
17:09
google know that you know this is a
17:11
video worth distributing to the wider
17:14
youtube so hopefully you enjoyed it and
17:16
i wish you best of luck on your trading
17:18
journey see you soon
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