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.
Many people first get into trading with a short-term focus. Their goal is to make within the first 12 months.
They think - understandably so - that making money last month means 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 the thing you need to know:
- 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, 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."
Statistician, former option trader, author
Here's how the math works out⁽²⁾:
Time frame Probability of success (%)
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 few months but later end up losing more. The problem is that people think short-term results are indicative of long-term performance! This is simply (and often) not true.
Now if we zoom 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 reliable way to succeed.
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:
- The process that translates erratic short-term results into stable quarterly returns, and
- Building a support infrastructure around that process
If you're starting from scratch, this might take 18 - 24 months to fully set up, with proper guidance.
The aim is not to make money right now, but to build a business around a 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 x %Return
Since most people can't afford to trade with a relatively large amount of capital (6-figure or more), 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 10% 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 soon 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:
Large %Return x Small Personal Account
Instead, you should be doing this:
Small %Return x Small Personal Account
Small %Return x Large Investor Account x %Fee
Many Customers x $Fee
Unless you have a 6-figure trading account, this is the fastest, most reliable way to derive a reasonable income from 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 works.
Forex Trader Business Model
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 (typically the S&P500).
Business Setup & Operation
While developing your trading strategy, you'll also be building the infrastructure that supports 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 go through the tedious process of setting up a hedge fund.
Trading Strategy Distribution
18 - 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 begin reaping the rewards of your work, and generate a growing asset/income from two sources: capital gains and trading fees.
Investors & Customers
This is the big picture of how to realistically make money in Forex trading.
- Develop a valuable service (i.e. your trading strategy/skills),
- Build business assets around it, and
- Distribute it for a recurring fee
A Forex trading business like this offers a win-win situation for all parties involved. The way you make a money is by helping others make money. 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.