Is your trading more like a gambling habit or do you want to make money consistently?
If it is the former then don’t bother about your accounting. If it is the latter then you need to be business-like about your trading. Whatever business we are in we need to keep our accounts, monitor our expenses and think about tax. This is as much a successful trading strategy as anything else.
Here are 4 essential things to think about when it comes to analyzing your business situation.
1 – Keep a cashbook
You will probably have heard us talk about the importance of keeping a trading journal and totalling up your profits and losses for each trade.
In addition to this you also need to keep an eye on your expenses. Do them regularly (for example every week or month) as it ends up being more time-consuming trying to work them out retrospectively months or a year later.
Here are some examples of the kinds of expenses you might incur:
- Internet connectivity
- Equipment purchases (e.g.: a new monitor)
- Training (e.g.: a mentorship course or convention)
- Brokerage fees
- Trading technology (platform and software fees)
- Possible: Home office allowance (depending on the rules in your country)
Then remember that your expenses are deductible against your profits for tax purposes.
2 – Research how your earnings are taxed
Do you pay yourself a salary from your profits or do you record them as capital gains? Make sure you know what you’re doing, what is allowed in the tax jurisdiction in which you live and, if you are serious about trading, whether you should open up shop in a different tax jurisdiction.
As with any self-employment, make sure you always put aside a percentage of any earnings for tax. Then you can invest any excess the next year.
3 – Know your brokerage or exchange fees
- Look at the leverage being offered. ‘For example,’ says Dr Aram Kiani, host of the Tradeguider Live Trading Room, ‘My broker gives me 1:30 leverage but ActivTrades gives me 1:250 leverage. The profitability is better so I am losing money [by staying with my existing broker] in a sense.’
- Evaluate your FOREX broker for slippage as well as spread, commissions and swaps. The robustness of your broker’s infrastructure will determine how fast they get your order to the interbank market and how good the counterparty they connects to is. This in turn affects the negative slippage you will want to avoid.
- Make sure the fees you are paying to your crypto exchange are as competitive as possible.
4 – Evaluate the whole picture
- Are you wasting money by moving brokers?
‘It might be that sometimes we try different companies, jumping around from broker to broker,’ says Aram. ‘But it is best to find a broker and stick to them so you can get the best leverage.’
It might be that there comes a point where you see another broker that is better, but make swapping to a new company the exception not the rule.
- Is leaving trades open all night worth it for you?
‘If you have a 20K fund and you have 5 to 6 trades open overnight, that’s a substantial amount of money they take off you as a fee,’ Aram comments. ‘And also all your margin is blocked. So for me for example when trading FOREX, it isn’t worth it. But every individual is different. Some leave some their trades open 24/7 for 2 weeks.
- A mentorship course might be worth it for you
‘Mentorship is vitally important as is 1-2-1 teaching,’ Aram comments. ‘If you are serious about trading 10K or 20K and you want to earn 4K a month out of it,’ he says, ‘doing a mentorship is a worthwhile expenditure because it will make you a better trader.’
Consider the cost of that course against the length of time your trading will be improved by it. It’s a long-term investment for you.
- Are your software costs worth it
Compare your monthly licensing fees (for example for your trading platform and any additional software) with your monthly profits. Do they represent a cost of doing business that is acceptable to you?
Summary: Think expense/profit ratio as much as risk/reward
While your trading technique and discipline is the key focus, it’s important to extend that discipline to the rest of your trading business. Even if you’re part time. Use the same precision and evaluation skills you have developed for entering, exiting and logging your trades for doing your accounts. Apply the same discipline to every aspect of your trading activity. And keep an eye for any inefficiencies that are impacting your bottom line. This includes your technology setup as much as bad habits - something we covered in the blog linked below.
Tradeguider is the home of Wyckoff VSA. In September 2021 we launched a game changer in trading software - our VSA Lite package - which distills the trading process down into 3 simple steps. Click here for more details.