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 employ 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⁾.
Any less, and passively investing in the S&P is preferable.
In my experience, a good target to aim for is an average annual return of 15% - 30%.
This level of performance is reasonably achievable for independent traders, while being attractive to both small-to-medium scale investors/customers (clients).
Now if 15% - 30% 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 1 or 2 years, but to generate above-market returns over the 10 years.
2. Sub-20% drawdowns
A significant part of any trading business is about 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 (peace of mind) working with you, they'll be more than happy to raise their stakes and even be an advocate for your 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 furious' 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 investment 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 money-making trading strategies can stand the test of time.
Many, in fact, stop being profitable after a number of months or 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 rapid and/or 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 uninspiring.
In the imperceptible long-term however, it produces consistent, above-market returns that compound into staggering levels of profit.
A client-focused strategy may not be exciting, but it produces far more reliable results.
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. That's normal. 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 3 -5 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 client decides to invest or work with you, he/she wants to know the type of person you are, and what you stand for.
Take this guide for example. You're reading this because you've read some of the other stuff I've published about trading, and are interested to know more about what I have to say about it.
You want to develop a similar kind of relationship with your audience. Let them get to know you better, so they can decide if you're someone they can see themselves associating with.
As long as you can demonstrate that you (A) are a decent human being and (B) have some level of expertise, most people will be happy to consider working with you in the future.
Choose A Communication Medium
You'll first have to decide on the mode of communication you are most comfortable with:
I am personally quite bad at video and audio, so I stick to the medium with which I can best express myself: writing. This is why most 90% of the content I publish (including this guide) is in text.
If you're comfortable on video, set up a YouTube account and start making videos. If you're good at verbal expression, start a podcast.
The medium you use isn't really important. What's important is that you speak in your own voice, and have something to say that brings value to your audience.
What To Talk/Write About
Trading is a dense topic. There are many aspects about it that you can explore.
Talk about the things that you are curious about. Talk about what you find puzzling, or the ideas you're interested in.
Chances are, the parts of trading that fascinate you are the same parts that fascinate others.
Don't feel like you have to be a "winning trader" before people will be interested to hear what you have to say.
Would you follow the journey of a learning trader who publishes his trading results and shares the lessons he picks up? I know I would. Why can't you be that guy?
By simply taking the effort to stand up and say something, you put yourself ahead of the 99.9% of traders who publish nothing.
Here are some tips with the process:
- Write/Speak clearly. Don't ramble. Have a point and make it.
- Say something useful or interesting. Don't just blindly repeat the platitudes. Take the time to really think about things. Have your own opinion.
- Be upfront about your shortcomings. Don't try to be someone you're not. People appreciate authenticity.
- Don't just talk about ideas - they are a dime a dozen. Talk about the things you're doing (actions), and share the process + results.
When To Start Building An Audience
This is important: you want to start building an audience before you have a working trading strategy.
If you wait until then, you'll have wasted a valuable opportunity to share the journey with your audience.
Don't get bogged down by trying to do everything perfectly. Your first few publications are going to suck. Guaranteed. You're going to be embarrassed about your first ten videos/audio clips/articles. That's normal. Get started anyway. People don't want perfection, the want authenticity.
Choose A Newsletter Application
When it comes to newsletter applications, there are many to choose from.
You can spend days agonizing over which one to use, but for now I suggest going with this free option: Tiny Letter.
Since your trading business is still new, it's best to keep things simple, and costs to a minimum.
Later on, when you have a few hundred subscribers, you can spend more time thinking about moving to a better (paid) option.
Continue to the next page
Forex Trading as a Business: The 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.