Reading 2022-01-26


  • Ref:: Analyzing Alpha
  • Title:: Trading as a Business: The Complete Guide
  • Author:: Leo Smigel
  • Year of publication:: 2022
  • Category:: Blog
  • Topic::
  • Related:: Side Business Idea

Notes from reading

Trading as a business involves trading stocks and other financial instruments under a legal business structure

What’s Your Trading Edge?

  • A trading edge is an observation or approach that creates an advantage over the rest of the market players
  • You need an edge to make it full-time, and you need multiple to make it a career
  • Most edges come from a better understanding of market structure, faster execution speed, or better data and analysis

What’s Your Risk Tolerance?

  • Risk tolerance refers to the degree of risk you’re able to take. And while there are multiple ways to define risk, we’ll consider volatility and drawdown for our purpose
  • When traders trade above their risk tolerance levels, at best, they’ll lose sleep and make suboptimal decisions the next day, and at worst, they’ll sell out at the exact wrong time

What Are Your Return Assumptions?

  • Return assumptions refer to the returns a trader or investor expects to make from a particular investment or their trading activities as a whole via their trading efforts in the financial markets
  • This average annual return is also known as target compound annual growth rate or CAGR. It’s the average return or profit you make divided by your capital
    • Unless you have history to back it up, investors shouldn’t set their target CAGR above 15%, and traders shouldn’t set their CAGR above 40%

Minimum Absolute Return

  • The minimum absolute return refers to the minimum return that a trader sets over a predetermined time frame
  • This return needs to cover your business expenses and the owner’s draw. The draw is the salary you need for you and your dependent’s living expenses

Target Absolute Return

  • This is the profit you want your trading business to create over the period, typically a year

Maximum Drawdown

  • refers to your maximum downside risk over a period. It measures the extent of the most considerable loss
  • Maximum drawdown is used to determine how much capital you’ll need to start your trading business

Capital Required

  • Capital required refers to the amount of money a trader needs to carry out trading activities within the financial markets

Time Commitment

  • Time commitment refers to the number of hours per week applied towards your new trading business

Your Trading Business Plan

  • is a document that details everything that you need to know to run your trading business. It includes your objectives, how you intend to make money, your edge, what you will trade and why, and how you will grow your business

Fixed Costs

  • Computer & equipment
  • Data feeds
  • Trading software
  • Administration software
  • Internet & telephone
  • Utilities

Variable Costs

  • Transaction fees
  • Slippage costs
  • One-time data costs

Benefits For Incorporating

  • asset protection through limited liability
  • transferability of ownership
  • ability to build credit and raise capital and tax savings
  • Securities are considered capital assets. The sales of these assets are taxable income considered as capital gains
  • trading is not considered a business activity by the IRS, so it is not possible to deduct business expenses as they are ineligible for tax deductions
  • As a trader, you need at least four trades per day. Trade executions on approximately four days per week. More than 15 trades per week, 60 per month, and 720 per year
  • Your average holding period must be under 31 days