If you have been day trading successfully and want to take your trading to the next level, you might consider turning your trading into a business. This is appealing for many people, particularly those who want to be their own boss, work from home and have the flexibility that trading allows. However, quitting your day job to rely solely on trading as your business is a big step and there are some points you need to take into account before you take the plunge.
Develop a Trading and Business Plan
Many people incorrectly think that trading as a business is simple because it is so easy to start trading. However, just like with any other new business or venture, a trading business requires research and planning. It is important to invest the time in researching all aspects of trading and developing a trading plan that will work for you. This includes:
- Personal introspection – Spend some time analyzing yourself. This may sound like inexact science; however, it is one of the most important aspects of this process. By understanding your personality and how it will impact your trading, you will be able to set trading and business goals that will suit you.
- Chart and historical analysis – Spend time analyzing charts and doing historical analysis in order to help you set your goals. These must include short-term (daily, weekly, monthly) goals, as well as long-term (bi-annual, annual and even lifetime) goals. Write your goals down on paper.
- Create entry and exit points – These tell you when to enter a trade and when to exit the trade. The exit limit helps to protect your capital and therefore protect your business so that you can continue trading long-term.
In order to turn your trading into a business you require sufficient capital. Having enough capital will allow you to take on the risk that is associated with trading and absorb the losses that will inevitably be incurred through trading.
How to Set Up Your Trading Entity
It is most common for a trading entity to be set up as a Limited Liability Company (LLC) in the state where you are resident. This is important as it separates your trading capital from your personal investments which limits your liability. It is important to understand all the tax implications of setting up a trading business as this will differ to when you were a casual trader. It may be worthwhile to hire a tax professional to help you understand and deal with all these issues. They can help you understand the tax implications of setting up a LLC and to understand if you qualify for trader tax status. A tax professional can help you understand Mark to Market accounting (MTM) which applies to trading gains and losses and how to deal with a losing year, if that happens. As a business, it is also worthwhile to know what expenses your business can write off. Make sure to consult with a licensed tax professional before you get started.