MONEY MANAGEMENT

The Business Of Trading

Breakeven Analysis For Daytrading
by Roberto Chahín

When you're creating a business plan, you've got to make sure you can break even, or better yet, make a profit. That goes for the business of daytrading, too.

Serious daytrading is a full-time business; it is not something that can be taken lightly. It is especially dangerous to try to daytrade while you are working at another job. Think about it: You're in between meetings or phone calls, and you're simultaneously trying to follow a market depth window or a time & sales screen. Your job will cause you to become distracted and prevent you from focusing on your trading, which will result in poor performance in both. Trading on an intraday basis requires your full attention, concentration, and commitment. If you decide to take up daytrading as a full-time business, it's important to treat it like any other business.

THE BREAKEVEN POINT

Your first step should be to draft a plan that will delineate your goals, strategies, and expected results. An important part of any business plan is the analysis of the breakeven point. In a retail business, the breakeven point is the value or number of sales needed to cover the overhead expenses and the cost of goods sold. For such businesses, you must determine the breakeven point by calculating the gross profit margin per unit (GPM), which is the difference between the sale price and the cost of each unit. Then you must take the overhead figure and divide it by the GPM to determine how many units you would have to sell in order to cover your fixed overhead costs for a specific period of time. This is not difficult, since retail businesses know the price and cost of the units they sell. But in the business of daytrading, calculating the breakeven point is more difficult because of the probabilistic nature of the markets.
 
 

  ...Continued in the October issue of Technical Analysis of STOCKS & COMMODITIES

Excerpted from an article originally published in the October 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.


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