One of the most popular and fastest growing segments within the trading industry is the foreign exchange market. There are many benefits for individuals interested in pursuing forex trading as a business. However, it is certainly not a get-rich-quick scheme as some gurus have made it out to be. Instead, it is a business model that can provide a solid income opportunity for those who are prepared to put in the necessary work to achieve success.
Why Start A Forex Trading Business?
In this lesson, you will learn all about the forex business opportunity. Before we begin to discuss the proper way to set up and run your forex trading business, let’s briefly touch upon some of the reasons why it’s a good opportunity to make additional income. Some beginners may have aspirations to make their currency trading business a full-time occupation, while others are more interested in getting into the forex business as a side hustle. Either way, the foreign exchange market can provide for a lucrative income for successful traders.
In the past, the currency markets were the exclusive domain of big banks and large institutions. But over the last 20 years or so, the forex market has become more available and accessible to retail investors. These days, you can begin trading the FX market with as little as $500 or $1000.
Although many brokerage firms will allow you to open an account which such small minimums, it’s advisable to save up at least several thousand dollars or an equivalent sum to get the biggest bang for your buck in your forex business. And so one of the major benefits to starting your own online currency trading business is the limited starting capital required.
Unlike some other types of investments and business ventures out there, such as real estate and brick and mortar businesses that require a relatively long period of time before you can begin to earn a descent return on your investment or recoup your original investment, the foreign exchange trading business can allow you to start generating income from day one.
Another big benefit when comparing a currency business with other traditional types of businesses is that there is no need to have to deal with clients, tenants, vendors, or employees. This is an ideal business wherein there is no ceiling to the amount of income you can generate and be able to do so as a one man or woman operation.
Another noteworthy benefit of entering the foreign exchange trading business is that you can do so at your own pace and work schedule. Most forex traders started off trading the markets while holding down a full-time job. This is completely doable, and actually the recommended path for most the majority of people interested in gaining exposure to the FX trading arena.
Since the FX markets are open 24 hours a day, five days a week, you will always be able to find time to do your market analysis and place your pending orders in the market. And this is especially true if you are focusing on trading the higher time frames such as the four hour, eight hour, and daily charts.
Get The Right Forex Trading Education
Once you’ve made the important decision that you would like to pursue a currency trading business, you will need to start taking the necessary steps to familiarize yourself with basic trading mechanics and the different types of trading strategies. The best way to start this journey is by learning about both technical and fundamental analysis.
Once you’ve had a sufficient amount of exposure to both, you will get a sense of what style of market analysis that you are more comfortable with. This is an important step in the process because the strategy for trading in the markets should be aligned with your own psychology. This is something that all traders will learn sooner or later, so it’s important that you take some time to evaluate your own strengths and weaknesses, so that you can focus on a methodology that is best suited for you.
One of the best ways to get this market exposure is by reading high quality currency trading blogs, viewing trading lessons on YouTube, and subscribing to a few notable forex related podcasts. All of these types of educational materials will be freely available to you.
From here, you will need to expand on your trading knowledge, and one of the best ways to do that is to sign up for a premium trading course. This is because most of the free trading material out there will be fairly basic and introductory in nature. This however, will not be sufficient in most cases to get you to consistency or profitability in the markets.
As such, an in-depth trading course from a reputable source is highly recommended. Now, the unfortunate news for many forex traders is that there is a vast quantity of low-quality trading courses out there, and only a handful of high quality recommended trading courses. As such, it’s imperative that you spend the time and do the proper due diligence to ensure that you are learning from a trader who actually provides valuable training material that will help you excel.
Trading courses are great in that you can work through them based on your own time schedule. However for some, a trading mentor or coach may provide for a better solution. Now most trading coaches will only offer their services to students who have already completed their course material, but others may take on new coaching relationships without any prerequisites.
In any case, an experienced trading coach will help guide you through the most important aspects of succeeding in your foreign exchange business. This can include coaching on topics such as trade setups, money management, risk reduction strategies, controlling emotions in the market, and more.
Setting Up The Proper Trading Infrastructure
The primary infrastructure that you will require for your FX trading business will be a computer, an internet connection, and a trading and charting software application. And so, a forex trading startup is relatively easy to set up. However, you must ensure that the components of your trading infrastructure are sound and best aligned for your style of trading. Generally speaking, scalpers and day traders will require a more robust set up compared to swing traders and position traders.
Let’s take a look at some of the technology that you will need in your trading business, We will assume that you will be starting off as a part-time trader.
So what type of computer system should you have for your forex trading business? Well, first and foremost it’s recommended that you trade with a desktop computer station, and one which has a solid-state drive, a quad core with at least 3 GHz, and preferably 16 GB or higher of RAM. A dual monitor setup would be a great addition to this workstation set up.
Now, if your budget does not allow for such a set up, then you might want to skip the multi-monitor option. You can always upgrade to it at some later point if you decide to. I would not, however, compromise too much on the processing power or memory capacity. This is because in order for your trading platform to process incoming data and run as efficiently as possible, you will need to meet this minimum requirement for the most part.
Now as far as your Internet connection goes, you’ll want to check with your provider to see the different product offerings they have. Also depending on your country and location, you may or may not be able to get access to the fastest Internet connections. Having said that, it is best to look for a solution that offers a minimum of 50 Mbps download service. If you reside near a major city, then this should not pose any issue for you. And as such, you may be able to enjoy service offerings of 200 or 300 Mbps in your area.
Last but certainly not least is the trading platform that you will use to execute your trading orders. Additionally if you will be using technical analysis as your primary market analysis approach, you will require a charting package as well. Some traders prefer to utilize their forex broker’s platform for both trade execution and charting. This can work based on your specific methodology, however, is not always the best solution for those who are looking for a more advanced technical analysis charting solution. As such, you may opt to have a separate charting software to perform your market analysis.
Choosing A Reliable Forex Broker
Selecting the right broker for your currency trading business is an essential ingredient to your trading success. Many beginning traders overlook the necessary due diligence required in selecting a suitable forex trading broker. These aspiring market traders make the mistake of believing that the majority of currency brokers within their jurisdiction are pretty much the same. While this may be true within certain countries or regions, is not necessarily what you want to assume.
So what are the characteristics that you should be looking for when selecting the right FX broker for your trading business? Well first and foremost, you want the broker that you’re doing business with to be regulated by a major government agency or body. For example, in the United States, the National Futures Association, and the Commodity Futures Trading Commission are responsible for licensing and monitoring the activities of foreign exchange brokers in the United States.
Similarly, the Financial Conduct Authority, also known as FCA, is tasked with this oversight responsibility of forex brokers within the United Kingdom. You’ll want to check within your specific jurisdiction to see who the primary regulatory body is and confirm that your short list of brokers are in fact licensed to do business by the specific governing body.
Another consideration when choosing a Forex broker for your trading business is the transaction cost component and the brokers primary business model. In other words, you will want to know whether your Forex broker works under the market-making model, the STP model, the ECN model, or some other hybrid variation.
Each of these different types of forex broker models will result in varying costs as it relates to bid ask spreads, and other related transaction costs.
The preferred forex broker model is the ECN model. Under this arrangement, client orders are automatically matched with minimal intervention by the forex broker, often resulting in the tightest bid ask spreads. Although it’s not necessary to trade with an ECN broker, it can greatly enhance your bottom line especially if you trade frequently.
Aside from these more concrete features that you will want from your forex broker, there are also some less tangible types of features that you may want to consider. For example, what type of customer service does your forex broker offer? It may be important for you to get assistance from time to time in a language outside of English. Some traders offer customer service, and chat features in a myriad of languages while others don’t.
What about the broker’s other offerings and features? Do they have a proprietary indicator or study that might help your trading, such as a sentiment indicator? What about educational training and webinars? These are all important questions that should be addressed when narrowing down your list of brokers.
Create A Currency Trading Plan
One of the critical steps in setting up your forex online business is to create a detailed trading plan. Essentially, a trading plan is a business plan specifically tailored for your forex business. In it, you will outline all of the particulars of your trading business including things such as your trading set ups along with clearly defined rules for entering, and exiting positions. In addition to this your trading plan should outline which markets that you plan on trading, and what time frames that you will focus on.
Furthermore, your forex business plan should provide for contingency plans in case your strategy begins to deteriorate, or you reach your maximum allowable drawdown limit. Similarly, on the flipside of the coin, you should also have a stated plan for handling trading profits.
You may for example, decide to withdraw half of your trading profits, and leave the balance in your trading account for capital growth purposes. In any case, you must write down all of these points in your trading plan and refer to it on a periodic basis to ensure that you remain accountable to your stated goals.
Aside from the obvious benefits of helping you stay more focused in your trading business, a properly created trading plan will help reduce your chances of falling into emotional traps, that are often the result of poor planning or lack of planning altogether. The mere act of writing down your intended trade related processes will help reinforce positive habits in your mind.
You should get to a place where any time you deviate from your intended process, it should make you feel uncomfortable to the point where you remind yourself of the pre-planned course of action you should be taking. This obviously takes some time and you will need to be intimately familiar with your outlined plan, but it is nevertheless, the first step towards effortless trading.
Practice Trading Your Strategy
It’s often said that practice makes perfect. And, as in many different aspects of life, this adage certainly applies to forex trading. In many respects, practicing your trading methodology within a demo account, can mean the difference between ultimately achieving success in the markets, and falling by the wayside.
In other words, you only want to commit your hard earned capital in the live market environment after you have had ample time to develop and test your trading ideas. Practice trading in a virtual account provides you this opportunity. And what’s more, most forex brokers will provide a demo account to you at no cost whatsoever. This is true of most brokers that offer the Metatrader trading platform.
When you take the time to properly apply your trade methodology within your demo account, you’ll be able to get a feel for the different metrics around your strategy. This includes your average win rate, your average win amount to average loss amount ratio, your largest win amount, your largest loss amount, maximum drawdown, and much more.
There are several reasons why knowing these data points are important. But the most important reason would be that once you become more familiar with the hard numbers behind your trading strategy, you will be more likely to stick with that strategy for the long-term, assuming that it is providing returns within the expected range.
Now having said that, there are some downsides to demo trading. The first of these disadvantages is that a simulated trading account will not necessarily duplicate conditions within the real trading environment. That is to say that many demo trading platforms will automatically fill your orders at certain price levels, without taking into consideration the true order flow that exists in the market.
This can have a drastic impact on your entry, stop loss, and target levels reported within your demo trading account as compared to what you may have really achieved within a live trade account. It is something that a demo trader should be aware of and try to compensate for as much as possible.
Another drawback to practice trading that needs to be addressed here is that it can lead to unrealistic expectations due to the absence of emotions inherent when demo trading an account as compared to trading with real money. That is to say that you can trade the same methodology within a demo account versus a live account, and yet get vastly different results.
This is because in the real trading environment there are psychological factors that can and do come into play which may force us to make decisions that we may not ordinarily within a paper trading account. Essentially, a trader can act very differently when real money is on the line.
Start Trading With Real Money
When you feel confident to move from a demo trading account to a live trading account, you should keep a few key points in mind that will help you in the transition.
Keep in mind there will be a big psychological shift when you move from demo trading to real money trading. Anytime we are risking our hard earned money, there can be a tendency for our emotions to drive our decisions. And so, there are a few ways to guard against the adverse effects of emotions within our forex trading business.
Starting off with a relatively small trading account would be the first step towards making a smooth transition. In other words, if you have allocated $3000 to start trading with, you may want to transfer just half that amount into your trading account, and leave the other half as a reserve.
This is advisable because as a new live trader, you will be learning the ropes while you’re trying to earn a reasonable return on capital. Think of it as an insurance policy just in case you go through a series of losses or realize an unexpected blow to your account. The funds that you socked away will bring new life to your FX and CFD business at a time when you may need it the most.
Along the same lines, another risk reduction strategy that you should consider employing is incorporating a fixed percentage risk per trade model. That is to say that you should only commit to a fixed percentage of your trading capital to any particular trade. That could be 2%, 3%, 4%, or some other fixed percentage. As a general guideline, risking 2 to 3% of your trading capital should be your maximum limit.
Anything beyond that would be much too aggressive, and make it increasingly difficult to overcome a large drawdown. So even though this may mean that you will be trading microlots, or minilots, instead of standard lot sizes, it is the best course of action when starting your forex trading business. As you gain more experience in the markets, you will come to realize that capital preservation is the most important job of a forex trader. Every other trading goal or priority should be viewed in light of this all-important rule of trading.
Journal Your Trades And Keep Refining
As with any other type of brick-and-mortar or Internet-based business, you must keep a good record of your trades and related data for your Forex trading online business. Aside from the accounting requirements of good record-keeping, you can enjoy greater improvement potential in your trading business when you decide to journal and review your executed trades periodically.
The importance of doing so cannot be overemphasized. You should get into the positive habit of writing down the particulars of each of your trades along with your thoughts during the execution process. By doing so, will get the benefit of documenting your thought process during that snapshot in time, which you can later study and improve upon.
This may seem like an unnecessary extra step, but is something that most successful traders will tell you was pivotal in their growth as a forex trader. And so, you should not underestimate the benefits of the journaling process. It is one of the best techniques for evaluating what your strengths and weaknesses are in your trading business, and allow you to address those areas that need improvement.
There are several different ways that you can keep track of your daily trades. One way would be to simply write it down manually on a sheet of paper, and create a folder that aggregates all of these daily journaling sheets together. This is obviously one of the most basic ways to track your trades over time.
A preferred solution would be to make use of a spreadsheet application or specialized journaling software designed specifically for trade journaling. A simple spreadsheet such as Excel or other open source spreadsheet would be sufficient for this purpose.
For those that are more inclined and prefer a deeper data-driven approach, a trading journal software would be recommended. There are several free trade journaling software programs available on the market, and some premium paid products as well that you can research. Any of these methods is better than none. Remember, the more your treat forex as a business rather than a hobby, the better off you will be.
Starting a forex trading business has many advantages as we have discussed in this article. At the same time, there are some common pitfalls that you want to avoid when setting up your FX business. You will want to make that you put together a forex trading business plan as early as possible.
It’s often said that trading is simple, but not easy. That is to say that those traits needed to achieve success in the markets are well known, however, as a practical matter it is very difficult to stay focused and disciplined when real money is on the line. As such, it’s imperative that you take time to understand your own strengths and weaknesses, and create a trading strategy that aligns with those personality traits.
And remember, although profitability may come relatively quickly for a small minority of traders, the overwhelming majority of people entering this field will require at least a year or longer before they begin to get a solid footing. So do not get discouraged too early in your trading journey.