Independent trading business model
Risk budget, costs, capital roll-forward, break-even Sharpe. Size positions from a volatility target and a VaR limit, derive the expected return from a Sharpe ratio rather than typing it, roll own capital forward through costs, a profit share, a draw and tax, and find the Sharpe ratio at which the business stands still.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: independent trading business model.Updated 30 October 2026
Who builds it, and for whatThe plan a trader writes before leaving a firm to trade their own capital through a business of their own, and the one a backer or an allocator reads before putting first-loss money behind them. It answers three questions in order: how much risk the capital can carry under a volatility target, a daily VaR limit and a drawdown stop; what the strategy must earn on that risk to pay for market data, software, exchange and clearing costs, financing, fees and the owner’s living; and how long the money lasts if it earns nothing. It is not employment at a proprietary trading firm, which pays a salary and bears the losses, and not a funded trader challenge, which charges a fee for an evaluation.
Every sheet below, in your browser, with its outputs and checks
Starter workbook free with an account. Worked model: one a month with Plus, every one with Pro. Downloads
| A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z | AA | AB | AC | AD | AE | AF | AG | AH | AI | AJ | AK | AL | AM | AN | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Assumptions | |||||||||||||||||||||||||||||||||||||||
| 2 | $k unless stated. Monthly periods, M1 to M36. Every figure is invented for illustration; the Sources sheet gives the basis of each. | |||||||||||||||||||||||||||||||||||||||
| 4 | Month | Unit | M1 | M2 | M3 | M4 | M5 | M6 | M7 | M8 | M9 | M10 | M11 | M12 | M13 | M14 | M15 | M16 | M17 | M18 | M19 | M20 | M21 | M22 | M23 | M24 | M25 | M26 | M27 | M28 | M29 | M30 | M31 | M32 | M33 | M34 | M35 | M36 | Notes | |
| 5 | Timeline | |||||||||||||||||||||||||||||||||||||||
| 6 | Month | # | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25 | 26 | 27 | 28 | 29 | 30 | 31 | 32 | 33 | 34 | 35 | 36 | ||
| 8 | Scenario | |||||||||||||||||||||||||||||||||||||||
| 9 | Scenario | # | 1 | 1 = base, 2 = upside, 3 = downside. Base and upside differ in the Sharpe ratio assumed; the downside follows the stated path of monthly returns below. | ||||||||||||||||||||||||||||||||||||
| 11 | Capital | |||||||||||||||||||||||||||||||||||||||
| 12 | Starting capital, own | $k | 1,000.0 | The owner’s money in the trading account at the start of M1. | ||||||||||||||||||||||||||||||||||||
| 13 | Outside capital | $k | 500.0 | A backer’s money, committed for the three years and traded alongside own capital. Set to 0 for none. | ||||||||||||||||||||||||||||||||||||
| 14 | Profit share paid on outside capital | % | 50.0% | Share of each month’s net trading profit on the outside capital paid to the backer. Its losses fall on own capital first. | ||||||||||||||||||||||||||||||||||||
| 15 | Further injection by the owner | $k | - | Set an amount to model a top-up of own capital. | ||||||||||||||||||||||||||||||||||||
| 16 | Month of the injection | month | 13 | A whole month from 1 to 36. | ||||||||||||||||||||||||||||||||||||
| 18 | Strategy and risk budget | |||||||||||||||||||||||||||||||||||||||
| 19 | Sharpe ratio, base | ratio | 0.80 | Expected gross return a year per unit of annual volatility. An assumption about the strategy, not a measured result. | ||||||||||||||||||||||||||||||||||||
| 20 | Sharpe ratio, upside | ratio | 1.20 | |||||||||||||||||||||||||||||||||||||
| 21 | Volatility target, annual | % | 15.0% | The volatility of returns on capital deployed that positions are sized for. | ||||||||||||||||||||||||||||||||||||
| 22 | Volatility of the instruments traded, annual | % | 12.0% | Per $1 of gross exposure. | ||||||||||||||||||||||||||||||||||||
| 23 | Daily VaR limit, % of capital deployed | % | 2.5% | The most the business accepts losing on one day in a hundred. | ||||||||||||||||||||||||||||||||||||
| 24 | VaR multiplier, one day at 99% | std dev | 2.33 | The one-tailed 99% point of the normal distribution. | ||||||||||||||||||||||||||||||||||||
| 25 | Trading days a year | days | 252 | |||||||||||||||||||||||||||||||||||||
| 26 | Maximum drawdown limit | % | 15.0% | Trading stops from the month after the strategy index falls this far below its peak. | ||||||||||||||||||||||||||||||||||||
| 27 | Volatility the VaR limit allows, annual | % | 17.0% | VaR limit / multiplier x square root of trading days. | ||||||||||||||||||||||||||||||||||||
| 28 | Volatility used | % | 15.0% | The lower of the target and what the VaR limit allows. | ||||||||||||||||||||||||||||||||||||
| 29 | Position size: gross exposure per $1 of capital deployed | x | 1.25 | Volatility used / volatility of the instruments. | ||||||||||||||||||||||||||||||||||||
| 30 | Daily VaR at that size, % of capital deployed | % | 2.2% | |||||||||||||||||||||||||||||||||||||
| 31 | Expected gross return a month, base | % | 1.0% | Sharpe ratio x volatility used / 12. Derived, not typed. | ||||||||||||||||||||||||||||||||||||
| 32 | Expected gross return a month, upside | % | 1.5% | |||||||||||||||||||||||||||||||||||||
| 33 | Downside: stated gross return path | % | -2.0% | -3.0% | 1.0% | -2.5% | -2.0% | -3.0% | 0.5% | -2.5% | -2.0% | 1.0% | -1.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | % of capital deployed. Invented: early losses, then small gains. Not a forecast. | |
| 35 | Costs, the draw and tax | |||||||||||||||||||||||||||||||||||||||
| 36 | Turnover: gross exposure traded a month | times | 4.00 | |||||||||||||||||||||||||||||||||||||
| 37 | Exchange, clearing and commission per unit traded | bp | 1.50 | Basis points of notional traded, the three together. | ||||||||||||||||||||||||||||||||||||
| 38 | Financing and margin interest, a year | % | 6.0% | Charged on gross exposure above capital deployed. | ||||||||||||||||||||||||||||||||||||
| 39 | Market data and terminal | $k a month | 2.0 | |||||||||||||||||||||||||||||||||||||
| 40 | Platform and execution software | $k a month | 1.0 | |||||||||||||||||||||||||||||||||||||
| 41 | Regulatory and accounting fees | $k a month | 1.0 | |||||||||||||||||||||||||||||||||||||
| 42 | Office | $k a month | 1.0 | |||||||||||||||||||||||||||||||||||||
| 43 | Owner’s living draw | $k a month | 4.0 | Paid every month, whatever the trading result. | ||||||||||||||||||||||||||||||||||||
| 44 | Tax rate on realised profit | % | 25.0% | Charged in the last month of each year on that year’s profit after costs; the draw is not deducted. | ||||||||||||||||||||||||||||||||||||
| 45 | Exchange, clearing and commission, % of capital deployed a month | % | 0.1% | Position size x turnover x basis points. | ||||||||||||||||||||||||||||||||||||
| 46 | Financing, % of capital deployed a month | % | 0.1% | |||||||||||||||||||||||||||||||||||||
| 47 | Fixed costs a month, before the draw | $k | 5.0 | |||||||||||||||||||||||||||||||||||||
| 48 | Monthly burn with zero trading profit | $k | 9.0 | Fixed costs and the draw: what leaves the account if trading earns nothing. | ||||||||||||||||||||||||||||||||||||
Select a cell to see its row, its schedule and the type of cell. Font colours: blue for inputs, black for formulas, green for links to other sheets. Scroll sideways to see every period.
Download
Independent trading business model: the workbook
An Excel workbook with working formulas, no macros and no external links: the same model you can work with on this page.
- Browse without an accountPreview every model online, sheet by sheet, with its outputs and checks.
- Free accountWork with every model online: change the inputs, switch the case, see every formula. And every starter workbook, with its key schedules left blank to build.
- L3VLUP Plus$4.99/monthEverything in Free, and one worked model each billing month as an Excel file: every schedule built, formulas live, checks at zero, yours to keep.
- L3VLUP Pro$25/monthEverything in Plus, every worked model in the library, and the Pro applications.
- The worked model
- 10 sheets and 2,529 live formulas, all 4 schedules built and linked, every check reading zero. Change an input in Excel and the whole model moves.
- The starter
- The same inputs and layout with the risk budget left blank for you to build, each blank cell marked. The worked model is its answer.
What the base case says
- Closing own capital, month 36 ($k)
- 992
- Change in own capital over three years ($k)
- -8
- Break-even Sharpe ratio at the volatility used
- 0.82
- Break-even gross return a year, % of capital deployed
- 12.3%
- Months of runway at the start, with zero trading profit
- 111
- Position size, gross exposure per $1 of capital deployed
- 1.25
- Daily VaR at that size, % of capital deployed
- 2.2%
- Month the drawdown limit is reached
- Not reached
- Fixed costs and draw over three years ($k)
- 324
Read from the workbook as served, every input at its default. Periods: M1, M2, M3, M4, M5, M6, M7, M8, M9, M10, M11, M12, M13, M14, M15, M16, M17, M18, M19, M20, M21, M22, M23, M24, M25, M26, M27, M28, M29, M30, M31, M32, M33, M34, M35, M36. The figures are invented and move with whatever you type in.
What this model is
A monthly model of an independent trading business over three years, M1 to M36: the owner trades their own capital, and a backer’s, through a business they run. It is not employment at a trading firm and not a funded trader challenge; the Sources sheet sets out the difference.
A risk budget sizes the positions: a volatility target capped by a daily VaR limit gives the gross exposure, the Sharpe ratio assumed gives the expected return, and a maximum drawdown limit stops trading. Costs that do not depend on winning (market data, software, exchange, clearing and commission on turnover, financing, fees, an office and the owner’s draw) and tax run through a monthly roll-forward of own capital.
Uses: finding the Sharpe ratio a business needs just to stand still, how long the capital lasts if trading earns nothing, and what a run of losses does to own capital when outside money is on a first-loss basis.
Seats: Equity research and hedge funds, Every seat.
How the schedules connect
Every row in the workbook is tagged with the schedule it belongs to; the inspector above shows the tag when you click a row. These are the schedules this model is made of and where each one lives.
Capital roll-forward
Own capital month by month, runway and break-even
Assumptions, rows 12–16 · Capital, rows 6–15 · Capital, rows 18–19 · Capital, rows 22–25 · Capital, rows 28–31
Risk budget
Volatility target, VaR limit, position size, drawdown stop
Assumptions, rows 19–33 · Risk Budget, rows 6–7 · Risk Budget, rows 10–16
Trading cost base
Turnover costs, financing, fixed costs and the draw
Assumptions, rows 36–48 · Cost Base, rows 6–8 · Cost Base, rows 11–13 · Cost Base, rows 16–21
Sensitivity tables
Two assumptions at once, without a data table
Sensitivity, rows 5–8 · Sensitivity, rows 11–16 · Sensitivity, rows 20–25 · Workings, rows 18–42 · Workings, rows 45–69
What you should be able to explain
- Why the expected return is a consequence of the Sharpe ratio and the volatility used, and why a VaR limit can cap the volatility a target asks for.
- How position size follows from the volatility target: gross exposure per $1 of capital is the target divided by the volatility of what is traded.
- Why most of a small trading business’s costs do not depend on winning, and why the break-even Sharpe ratio, not the expected one, is the number to test against evidence.
- What a drawdown stop does and does not protect: it stops the strategy losing more, while fixed costs and the draw carry on.
- How first-loss outside capital raises the return on own capital in good months and concentrates the losses on it in bad ones.
What a reviewer looks for
- An expected monthly return typed in as a hope, with no volatility or Sharpe ratio behind it.
- Costs entered as a share of profit, so a losing year looks cheap, when market data, software, fees and the draw are paid either way.
- A drawdown limit measured on capital after the draw, so living costs trip the risk limit and a losing strategy hides behind a profitable month.
- Outside capital counted as runway, when it belongs to the backer and losses on it fall on own capital first.
- A normal VaR read as the worst day, when trading returns have fatter tails than the normal distribution.
Conventions this workbook uses
Stated on the cover sheet too. A model is only as trustworthy as the decisions it tells you it made.
- Monthly periods. Volatilities, Sharpe ratios and rates are annual; a monthly return is the annual one divided by twelve, and daily volatility is annual volatility divided by the square root of the trading days in a year.
- Position size = volatility used / volatility of the instruments, where the volatility used is the lower of the target and the volatility the daily VaR limit allows (VaR limit / multiplier x square root of trading days). The multiplier assumes normally distributed returns.
- Base and upside: expected gross return a month = Sharpe ratio x volatility used / 12, earned in every month on capital deployed. That is an expected path, without the month-to-month noise real returns carry. Downside: a stated path of monthly gross returns. Interest earned on cash in the account is left out.
- Capital deployed = opening own capital + outside capital, while trading and while own capital is above zero. Exchange, clearing and commission = notional traded (capital deployed x position size x turnover) x basis points. Financing is charged on exposure above capital deployed.
- Drawdown stop: the strategy index compounds the net return after trading costs while trading. When it falls the maximum drawdown limit below its peak, trading stops from the next month for the rest of the three years; fixed costs and the draw continue.
- Outside capital is traded on a first-loss basis: in a profitable month the backer receives the profit share on its pro rata part of the net trading profit; in a losing month own capital bears the whole loss. No high-water mark.
- Tax is charged in the last month of each year on that year’s taxable profit (net trading profit kept, less fixed costs; the draw is not deducted). A loss year pays none and is not carried forward.
- Runway = own capital / (fixed costs + the draw), the months the business lasts if trading earns nothing after its own costs. Break-even: the net return a month that leaves own capital flat at the start, after the profit share, fixed costs, the draw and the tax on the profit that pays for it; the break-even Sharpe ratio adds back trading costs and divides by the volatility used.
- The Outcomes sheet runs all three cases at once from one row per case on the Workings sheet; the Checks sheet holds the selected case’s row to the roll-forward in every month. The closing-capital grid runs the base case once per cell with that cell’s Sharpe ratio and volatility target.
Build it yourself
The starter workbook
The risk budget has been cleared: the volatility the VaR limit allows, the volatility used, the position size, the daily VaR at that size and the expected monthly returns on the Assumptions sheet, and on the Risk Budget sheet the gross and net return for the selected case, the trading flag, the strategy index, its peak, the drawdown, the month the limit is reached and the deepest drawdown. Build them so the Cost Base and Capital sheets calculate again. The Checks sheet shows when the outcome rows, the drawdown stop and the grid agree with your roll-forward.
Blanks: Risk budget. Download it beside the worked model.
The path around this model
Understand it, drill it, read the build, then apply it to a real company.
Read · Guide · 8 min
Hedge Fund Interview Questions Beyond the Stock Pitch
Read · Guide · 8 min
Sales & Trading Interviews: What Actually Gets Tested
Read · Guide · 10 min
Scenario and Sensitivity Architecture: Building a Model That Can Be Stress-Tested
Apply · Skill
Model Audit
Find the errors in a financial model before someone senior does.
Vocabulary: Sharpe Ratio, VaR (Value at Risk), Drawdown, Position Sizing, Volatility (Implied vs. Realised), Burn Rate and Runway.
Questions about this model
What does the base case show?
At a Sharpe ratio of 0.8 and 15% volatility, the expected gross return is 1.0% a month on $1.5m deployed, $1.0m of it the owner’s and $0.5m a backer’s. After trading costs, the backer’s profit share, $5k a month of fixed costs, a $4k draw and tax, own capital ends the three years at about $992k, almost exactly where it started. The break-even Sharpe ratio is 0.82: the strategy has to be at least that good just for the business to stand still.
Why is the Sharpe ratio an input and the monthly return derived?
Because a return without the risk taken to earn it says nothing. The Sharpe ratio is expected return per unit of volatility; multiplied by the volatility the risk budget allows and divided by twelve, it gives the expected monthly return. Change the volatility target and the return, the position size, the turnover costs and the daily VaR all move together, which is how a risk manager reads a plan.
What happens in the downside?
The downside is a stated path of monthly returns, not a lower Sharpe ratio: early losses, then small gains. The strategy index falls past the 15% drawdown limit in month 9 and trading stops. Because the outside capital is first-loss, own capital has borne every loss on the whole $1.5m, and with fixed costs and the draw still running it ends the three years at about $438k. Nothing in the model says how likely that path is; it is a case to plan against.
How is this different from working at a prop firm or passing a funded trader challenge?
A proprietary trading firm employs its traders, pays a salary and usually a bonus, and bears the losses on its own capital, so working at one is a job. A funded trader challenge charges a fee for an evaluation, usually on a simulated account; passing it is not employment and the fee is paid either way. This model is neither: it is a business the owner runs with their own money at risk, which is why the cost base and the runway matter as much as the strategy.
What do the published studies of individual traders say?
The Sources sheet cites three, as context rather than inputs: a 2014 Journal of Financial Markets study of Taiwanese day traders found fewer than 1% able to earn positive returns net of fees predictably; a 2019 working paper on Brazilian futures day traders found 97% of those trading on more than 300 days lost money; and ESMA’s 2018 measures on contracts for difference cited national regulators’ figures of 74% to 89% of retail accounts losing money. They describe individuals rather than a business run on a risk budget, which is why the break-even Sharpe ratio should be read against them.
Related models
Credit and restructuring · Core
13-week cash flow model
Weekly receipts, disbursements, revolver, liquidity
Core modelling · Foundation
Creator and newsletter model
Subscriber funnel, paid tier, sponsorship, LTV, breakeven
Core modelling · Foundation
Integrated three-statement model
The operating model everything else sits on
Questions about this model
Discussions open here soon.