The Business Plan
Let's now get into the details of setting up a Forex business.
The first and most important thing to work on, is the development of a client-focused trading strategy.
As the core of the whole operation, the type of strategy you trade with makes a big difference to how quickly your business can grow.
As the name implies, a client-focused strategy is centered around characteristics that appeal to investors and customers.
Client-focused strategies have the following 5 characteristics:
1. Above-market returns
The minimum acceptable return for any trading strategy is the industry benchmark of 8% per annum, which is based on the historical performance of the S&P500 index⁽¹⁾.
In my experience, a good target to work towards is an average annual return of 10% - 25%.
This level of performance is reasonably achievable, while being attractive to most people.
Now if 10% - 25% per year seems like a low target, consider that the goal is to maintain this performance over the next 10 years in an industry where most traders don't last even 2 years.
The aim is not to generate high returns over the next couple of years, but to generate above-market returns over the next decade.
2. Sub-20% drawdowns
A significant portion of a successful trading business involves keeping your clients satisfied.
This means that they should never have to worry about significant capital loss, which is generally achieved by keeping drawdowns smaller than 20%.
Drawdowns over 20% = Stressed clients = Clients leave = Bad for business
The less worried your clients are about drawdowns, the more funds they will invest with you down the line, and the more likely they are to recommend you to their friends.
After 6 months of generating above-market gains with sub-20% drawdowns, don't be surprised if your clients and/or assets under management suddenly increase by 50% or more.
When people have a good experience (i.e. peace of mind) investing with you, they'll be more than happy to raise their stakes and even be an advocate for your trading business.
3. Low-volatility growth
One of the things you'll come to learn about the investment business is that that clients overwhelmingly prefer incremental growth over sporadic growth, even if the latter produces an overall higher return.
This means that your trading strategy should be inclined towards 'slow and steady' growth rather than 'fast and choppy' growth.
The latter approach, while exciting, eventually leads to large drawdowns that threaten the survival of your business.
So what you want to have is a low-volatility equity growth curve that is (relatively) stable and perhaps even "boring" to watch.
4. High Capacity
'Capacity' refers to the maximum amount of capital a strategy can handle, beyond which returns start to diminish.
This is an important consideration because the higher your strategy's capacity, the more clients you can take on, and the higher your income potential.
Generally speaking, the larger the profit target of a trading strategy, the higher its capacity.
In my experience, the smallest acceptable profit target is 10 pips. Any less, and the maximum capacity will likely be too low for a worthwhile trading business.
Not all currently profitable trading strategies will stand the test of time.
Many, in fact, stop being profitable after a number of years.
The key, is to center your strategy around a simple, robust idea that can be applied to a wide variety of market situations.
This way, your trading performance can be maintained over long periods of time, even when there are significant changes to the market phase/regime.
It is better to have a strategy that works decently well in most situations, than a strategy that works extremely well in a few types of situations.
A client-focused trading strategy is, ironically, the opposite of what most people think trading is like.
In the perceptible short-term it is slow, routine, and seemingly uninspiring.
In the imperceptible long-term however, it produces consistent above-market returns that quietly compound into staggering levels of profit.
A client-focused strategy may not be exciting in the short-term, but it produces far better results in the long-term.
Trading Strategy R&D
The topic of strategy development is extensive and goes beyond the scope of this guide.
If you want the specifics, consider joining the Positive Expectancy course.
Generally speaking, there are 3 stages of trading strategy development.
1. Idea generation / Strategy sourcing
First, you need a core idea to build a strategy around.
If you don't know where to begin, you can start by getting ideas here:
A word of caution: Most of the strategies you'll come across on the internet are poorly designed. For now, just get a sense of the various types of strategies out there, and pick out the few that make sense to you.
Once you've identified the strategies you're interested in, the next step is to test their effectiveness over historical market prices. This can be done either manually or with computer algorithms.
When you find a strategy with promising back-test results, try tweaking the strategy parameters (entry rules, stop loss, profit target) and back-test it again to see if it continues to produce acceptable results.
If it does, then the next step is to run a forward-test.
In this final stage, you execute the strategy over live market prices on a small live account.
This process gives you a better indication of the real-time effectiveness of the strategy. Any mistakes made during the back-testing stage will be revealed here.
If the strategy continues to perform during forward-testing, the final step is to fund the trading account with a moderate amount of capital and keep adding more funds over time.
After all this, your job is still not done. In order to reduce your reliance on a single strategy, you'll want to start the process again with a new strategy to add to your trading "arsenal".
Over time, you want to be trading with multiple strategies, so your capital is diversified and you always have alternatives should any one of them stop working.
Business Asset Setup & Operation
Now let's get down to the 'business' side of things.
At the very least, you'll want to maintain a:
- Mailing list of potential investors and customers (clients), and
- A website or blog
These are the assets with which you'll build a trading business.
Why Build An Audience
Before a clie