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forex business model

​Here's ​the ​first thing​ you need to understand about trading:

There is no ​reliable way to make fast money​.

The only ​way to get ​​get rich ​quick ​​is by being extremely lucky.

​This doesn't stop most people from trying, though. And ​most of the time, they​ end up losing¹⁾​​.

​You see, ​​Forex trading is an endeavor ​that rewards the long-term ​business builders at the expense of the short-term opportunity seekers.

If you want to succeed in this business, you can't approach it with a short-term mindset.

Short-Term Thinking

​Many people first ​get into trading with a short-term focus. Their goal is to make within the next ​few weeks.​

They ​think ​- understandably - that making money ​last month means that they are on the right track.

What they haven't realized, however, is that trading results over a period of 3 months or less are largely random.

Here's what ​winning traders understand:

  • You can trade with a losing approach and ​​make money over the next few ​weeks
  • ​You can ​trade with a winning approach and ​lose money ​over the ​next few ​weeks

​Winning traders understand that weekly or even monthly results are poor indications ​of long-term performance.

In the book Fooled by Randomness, ​author Nassim Taleb explains this with an example:

​"​A 15% return with a 10% volatility per annum translates into a 93% probability of success in any given year. But seen at a narrow time scale, this translates into a mere 50.02% probability of success over any given second."

nassim taleb

​Nassim Taleb

​Statistician, ​former option trader​, author


And ​here's how the math​⁽²⁾ works out:

 ​     Time frame​    ​​​Probability of success (%)
year               ​93.3​​1928  
quarter            77.3​3726  
month           ​   66.7​4972  
day     ​           53.1​2902  
hour          ​     50.6​3934  
minute   ​          50.08​254  
second             ​50.01​066   

With ​a winning approach that yields 15% per year, the chance of each day being profitable ​is just 53%. ​That's only marginally better than a coin flip.

Even on the monthly ​level, the probability of each month being profitable is just 67%.

This is why you'll find many traders who either start out losing and quit, or make money in the first ​​f​ew months but later end up losing even more​.​ The problem is that ​people think ​short-term results are ​indicative of long-term performance, ​which is ​often not true.

​Now if ​we zoo​m out ​to​​ the quarterly time frame, ​we'll get a much ​better indication of long-term performance. ​With the same trading approach, the chance of ​success goes up to 77%.

​What does this tell us?

​It tells us that we should ​shift our focus from making money every day/week/month, to making money every quarter/year.

This ​a big reason why it makes sense to ​approach Forex trading ​as a long-term ​business, ​rather than a ​​short-term ​opportunity. ​It's the most likely, most reliable ​​way to ​succeed​.​

Long-Term Thinking

With long-term thinking, we are not concerned about the outcome of our trades over the next few weeks or months.

Instead, we are concerned about:

  1. The process that ​translates short-term​ results into stable quarterly returns, and
  2. Building a support infrastructure around ​that process

If you're starting from scratch, this might take​ 18 - 24 months to set up, with proper guidance.

The aim is not to make money right now, but to ​build a business around the process that ​delivers​ long-term, sustainable ​profits.​

​Why ​Traders ​Fail

​​One of the biggest reasons people fail at trading is because they try to ​make a living ​trading with just their own capital.

Here's the income formula you're probably familiar with:

​​​Income  =  Capital * %​Return​

​Since most people can't afford ​a large (6-figure or larger) ​account, they ​try to dramatically increase the​ %Return component​ ​​in order to hit their income goals​.

With a $10k account, for example, ​one might try to ​achieve a 1​0% return each month ​in order to make just $1k.

Now consider that Warren Buffett's average monthly​ return is approximately ​1.7%.

What's the likelihood of ​​anyone​​ consistently out-performing the world's most successful investor, more than 5 times over?

I can tell you right now: ​the chance ​is ​virtually zero.

And ​this is ​exactly why so ​why people fail at trading​​! They ​take on ​unsustainable amounts of risk ​in an attempt to reach their income goals, but ​eventually ​spiral out of control and blow up.

​This is the approach we want to avoid.

​Instead of ​ ​trying​ to attain ​double-digit returns in the %Return component (which isn't sustainable)​, we ​will be ​focus on increasing the Capital component of the formula, and build a ​business ​that ​produces multiple sources of ​income.​

Most ​people ​try this​...

Income    =  

Large % Return  *  Small ​Personal Account

​We'll be doing this...

Income    =

Small ​​% ​Return  *  Small ​Personal Account

+

Small % Return​  *   Large Investor Account  *  % ​Fee

+

​Customers  *  ​$ Fee

​Unless you have a ​6-figure trading account​, this is ​the fastest, most reliable way to make a decent living ​with Forex trading. ​The key is to ​have ​multiple ​income ​streams.

​Now with this ​understanding, we can finally get down to the business model ​of how ​this will work.


​Forex ​Trader Business Model

1

Trading Strategy ​​R&D

​The first step ​is ​to develop a trading strategy ​that generates above-market returns ​with lower, or equal drawdowns. ​It's important to understand​ that you don't have to be generating high​ percentage returns - you ​only ​have to beat​​ the​ investment ​industry benchmark (​i.e. the S&P500).

Trading Strategy

2

​Business Setup & Operation

​While​ ​developing your trading strategy, you​'ll also be ​constructing the infrastructure/assets of ​your trading business. This includes ​the ​setting up of a mailing​ list, a website, and the various avenues ​of​​​ distributing ​your ability ​to ​grow capital​.​ This is all done via 100% legal channels, and without having to set up a ​hedge fund.

Business Assets

Trading Strategy

3

​​Trading Strategy Distribution​

12 - 24 months later, ​if you've done everything properly, ​people from all over the world ​will be ​looking ​to grow their capital with you.​ Depending on your preferences, you now will ​choose ​to offer your trading services in various ways. You can ​charge a performance fee, ​a fixed monthly fee, or some ​combination of both. This is when you will begin reaping the rewards of your work, and ​​generate a growing asset/income from ​two sources: ​capital gains and​ trading fees.

Business Assets

Trading Strategy

Distribution

channels

​Investors & Customers

This ​is the big picture of how to realistically make money in Forex trading.

You:

  1. Develop a valuable service (i.e. your trading strategy/skills),
  2. Build business assets around it, and
  3. Distribute it for a recurring fee

A Forex trading business like this offers a win-win situation for ​all parties involved. Everybody benefits.

Now in the next page, I'll go over some of the details of this business model.

Continue to the next ​page

​Forex Trading as a Business: Business ​Plan

About the Author

​My name is Chris Lee and​ ​I've been a retail Forex ​trader​ ​since 2005​. I've gone through many successes and failures, including ​managing a 7-figure ​investor account (which was ​great), ​and ​losing​ a ​6-figure personal account (which was not great).

You can check out my ​latest performance results ​here​.