There’s lots of research out there about business failure and for the most part, the same could be said for trading. Here’s a list of the 10 most frequented catalysts for business failure:
1. 78% lack a rigorously-developed business plan keyed to the realities of their market, including sufficient research on the business before launching it.
2. 73% fail because the owner is wildly optimistic about projected sales, break-even point, and capital required.
3. 70% fail because the optimistic owner believes he/she can wing it on important issues with which he/she is ignorant, and ” can’t afford ” to hire the expertise to get it done right the first time.
4. 63% of new business owners simply don’t have the required business experience to make a success of the enterprise.
5. 82% lack cash-flow management skills. They don’t understand the importance of controlling cash flow.
6. 79% launch with a bright idea and little or no capital.
7. 77% don’t have a rationally-developed pricing model for their products or services.
8. 64% don’t have a clue as to how to aggressively promote their business, nor do they understand its importance.
9. 55% don’t understand their competition, or assume it can be safely ignored.
10. 47% rely too much on one customer/client.
Notice that the number one cause of business failure is the lack of a plan and we’ve all heard the old adage of “if you fail to plan you plan to fail”, but what about trading? Yep, if you don’t have a plan, then you are more likely to fail at trading.
No matter where you are in your trading, take a moment here to ask yourself if you are treating it as a business. For a select few, trading is a business in the sense that it’s their only source of income while others treat trading as a large part of their income but also draw upon other areas. The key is that you treat it as a business.
Here are a few considerations for you as you begin to design your trading (business) plan:
Use capital that you don’t need to live off of; whether it’s an old 401(k) you’ve rolled into an IRA or a small portion of your savings. Just make sure that you don’t need the capital in the next two years. Doing so removes a lot of the emotional attachment that can come from investing money that is “needed” or that can’t be lost.
Clearly defined, yet practical goals that you’d like to achieve. Defined to the point that you have some mile markers along this journey that will allow you to make sure you’re actually progressing.
Go in knowing that you’re not likely to replace your income in six months. If it were that easy wouldn’t everyone be doing it? A nicely defined portfolio tracking spreadsheet should serve as a great visual.
Choose a period for review and have someone else check your business plan and make sure that its sound. This person should be a mentor, someone whose been there and done that. Just make sure that you review and make adjustments as needed.
Treat your winners as income and your losers as a business expense. In any business you’re going to have both. Any good business has more coming in than going out so couch the winner/loser verbiage into income/expense and change your mindset.
Don’t be afraid to seek the help of others. There are both free and paid resources out there that can give you a “leg up” in the markets. Don’t go it alone (see #3 above)!