Trading as a Business
Treating any Forex Trading as a business is an essential ingredient for successful trading. When traders treat it as a hobby, they end up behaving and making decisions as if they are gambling for entertainment rather than making sound business decisions. Forex Trading is serious business and should be approached that way. It is very important to make the distinction between trading Forex and gambling for fun.
Just like any business, there are costs involved. The goal is for your profits to exceed your expenses by a significant amount. Just like any other business, there are starting expenses, a learning curve and daily expenses. Since you know that no trader wins every time, the losses are part of your expense of doing business. Obviously to keep your business afloat, your income needs to be much larger than the losses, but the losses are part of the process.
Costs of doing business as a Forex Trader are not only your losing trades. It is important to factor in commissions, taxes, computers and software, office equipment and spreads you will have to pay. Yes, it is true that your most significant cost will be losing trades, but if you make sure to build that into your business plan, you will be better equipped to deal with those losses. Then you will not beat yourself up about them too much.
Forex Trading success has two main directions it can take. Either you have to have many more profitable trades than losing ones or your profitable trades have to be much larger than your losing ones. Of course, there are many different ways to accomplish either of these possibilities. Seasoned Forex Traders will tell you that the second possibility is much more realistic than the first. The ratio of risk to reward is a large part of this equation. When your risk to reward ratio is 1:2, then you only have to profit on about one third to half of your trades to have a profitable business.
As opposed to most traditional businesses, in Forex Trading you have less control over the product. When you are selling a product or service, the quality of the product or service is the part that you would have the most control over. Making your product or service the best on the market mitigates your risk tremendously. It doesn’t quite work that way in Forex Trading. In Forex Trading businesses, the control you have is in the decisions, the strategy and the knowledge. The more you learn and understand the Forex market, the better your decisions and strategy will be, hopefully leading to more successful trades.
Just like perfecting your product or service takes being on top of what is happening in the field, so does perfecting your Forex Trading strategy. It takes constant learning, improving, and studying the market to learn to make the best decisions possible. When a Forex trader is approaching trading as a hobby or gambling they are looking for the one or two lucky breaks. As a business owner, you are going to be looking for the best long term strategy and one or two lucky trades will not keep your business alive.