One of the biggest mistakes that many Forex traders make is that they don’t treat their Forex trading like it’s a business. Instead, they treat it like a trip to the casino, and many of them end up behaving like drunk gambling addicts instead of calm and calculating traders. If you want to succeed as a Forex trader, you have to think of it as a serious business, because it is.
There are costs to being a Forex trader, just like any other business. Your goal as a trader is to try and bring in more money through revenue (winning trades) than you have going out through your costs. If you can do this, you will make a profit. However, if you let your costs (mainly losing trades) get out of control, you will lose money and your Forex business will go under (you’ll blow out your trading account)
The cost of doing business in the Forex market
Just as you have costs in any other business, you have costs as a Forex trader. Your costs as a trader are the losing trades you have, the commissions and spreads you pay, computer and other office equipment, etc. No matter how hard you try to avoid losing trades, you are always going to have them, and they are the biggest cost that you have as a Forex trader. Sadly, many traders don’t think about trading like this, instead they think of trading either is a trip to the casino or they view it as something they can become “perfect” at and never have any losing trades.
The reality of being a trader is that you will always have losing trades, no matter how hard you try to avoid them, you will have them. So, that’s your number 1 cost of doing business in the Forex market. What you’ve got to do is what every other business does; make sure that your revenue offsets your costs enough for you to make a profit.
So, to clarify this situation, let’s list some of the main costs of having a Forex trading business:
* Losing trades
* Broker spreads or commissions
* Computer (hardware)
* Other office equipment
These are going to be the primary costs of running your Forex trading business, now there might be others, but these are the biggest ones for most traders. Your goal is to make sure that you make enough money from your winning trades (revenue) to cover all your costs and then some, so that you make a profit.
How to make your Forex trading business profitable
Now, there is quite a bit that goes into become a consistently profitable Forex trader. So, we aren’t going to go into ALL of the details in this short lesson. But, I am going to give you a general outline of what I feel is the most important piece of the puzzle of making your Forex trading business profitable.
As I mentioned above, you’ll have to make sure your winning trades are more than offsetting all your trading costs if you want to be a profitable trader. So, there are basically two ways to accomplish this:
1) Have a very high percentage of winning trades compared to losing trades
2) Aim to have winning trades that are significantly larger than your losing trades.
Most traders with a little live account trading experience would agree that it’s a lot easier to use option number 2. What we are essentially talking about here is risk reward. If we aim for a risk reward ratio of 1:2 on every trade we take, we only need to be right about 35 to 40% of the time to make a decent profit. Most professional traders are not winning a high percentage of their trades like 70 or 80%, instead they typically win somewhere around 40 to 60% of their trades. But, they understand that by making sure their winners outpace their losers by a substantial margin, they can reduce the burden of having to win a high percentage of the time.
One thing that’s especially important to remember is that you don’t have to be right to make money trading. What that means is that you can be wrong more than you are right and still make money in the markets. Given that it’s difficult to win a high percentage of the time in the markets, it’s far better to just use the power of risk reward and make sure your winning trades far out-pace your losing trades.
How trading differs from other businesses
In other businesses you find a market, you learn a skill or develop a product, and then develop that skill or product until it is better than other people in the same business or niche. Trading is the same – it is a business – and if you want to be one of the financially secure you will have to work at it, in the exact same manner as an astute business person. In conventional business you have to be patient, focused, disciplined, very committed, hard working, forceful, and in complete control of yourself and in control of your plans.
To be successful in your forex trading business you can’t be forceful or control the market, all you can do is identify what is happening and determine if your trading edge is present or not. That’s not to say that you can’t be confident with your trading, but you need to realize early in your career that you are not bigger than the market, and although you run a trading business within this large market, you are never truly in control of whats happening in the day to day forex market movements and events.
You can never be reliant on tips or one lucky trade to secure your future, nor can you build a trading business using a mechanical autopilot kind of system. You have to continuously work at it until you have developed a trading strategy, and even when you have developed that strategy, it will require ongoing effort and monitoring.
How to build your Forex trading business
Successful Forex traders know the main part of their trading business is the development of their trading skills, not continually looking for the ‘Holy Grail’. When you have a set of trading rules that suit you and you are happy with what you have, you need only improve your skills to implement them, this will take much of the stress and anxiety out of trading and it will become enjoyable. That’s right, trading can become enjoyable once you have faith in your rules and your method.
Once you have a forex strategy that works for you don’t keep messing around with it, try to remain very consistent and subject yourself to the trading opportunities it identifies. I have read in so many articles out there on the web that you should keep searching for a different method or system to improve your trading, and I respond to that by saying, ‘ this is complete rubbish’ … rather, I strongly suggest trying to stick with what you have and see it through, you need to give things a chance to work and prove themselves.
When you begin to remain consistent and disciplined with your thinking, and of course your trading plan/rules, then you can create a dynamic Forex trading business that will help secure your financial future or simply make your trading much more enjoyable and relaxing.