One of the biggest mistakes Forex traders make is addressing trading as a hobby. The reality is trading Forex (foreign exchange) is a business and should be processed as such.
What separates professionals from hobbyists are professionals are prepared, and willing to go that extra mile.
Before you embark on a quest to master the Forex market, consider the work involved. Trading success, like any other business, takes determination and commitment.
Many currency traders identify with the idea of approaching trading as a business, yet may be uncertain of what this entails. The following article should help paint a clearer picture.
Great Businesses Have Great Plans
A business plan is a strategic tool for entrepreneurs, in place to help make informative decisions, to circumvent large mistakes and communicate ideas to prospective investors. Professional currency trading is no different. To succeed in FX trading, you must devote yourself like you would any other business.
There are essentially two types of professional traders, those who trade under a financial institution and those who trade from home, a retail trader.
An amateur trader can be either someone who is currently studying the markets, expecting to reach trading consistency, or someone who has a punt every now and then. The latter, however, is generally referred to as a gambler. Trading as a hobby, in most cases, is gambling. Traders in this category overlook the necessity of a trading plan and frequently expose positions to excessive risk.
Professional traders operate from a well-defined trading plan, the equivalent of other business plans. A trading plan is a road map, designed to get you from A to B and help guard against emotional errors. It includes aspects such as risk and money-management strategies, the rules of engagement for each trading system (or trading strategy) employed, the currency pairs in focus and the Forex brokers you trade with (detailing each trading account). Ultimately, A trading plan should cover everything required to function successfully and manage risk.
Among the things already highlighted, a trading business plan will also account for measurement and testing, reviewing the system’s statistics. What’s more, a professional will have clear goals laid out, along with a dedicated trading journal.
Trading Forex: A Business
If you’re trading as a business, you think long term.
If you’re trading as a hobby, you think short term.
A business earns revenue by selling goods or services. As well as this, each month, or quarter, the business will incur expenses like rent and stock. The difference between revenue and expenses is income. Over the long term, the business knows, based on previous years, revenue generally exceeds expenses. The way losses are interpreted by professional traders is similar. This makes it easier for professional traders to accept losses in trading, and carry them as an expense of doing business. Like a business, a trader knows, over the long term, trading with positive expectancy will often generate a return that exceeds expenses.
Short-term thinking narrows sight. One trading loss can feel like the end of the world and often lead to revenge trading. This is a condition that affects most traders at one point or another, regularly setting itself up after breaking rules or experiencing consecutive losses. As you can imagine, this practice rarely has a beneficial impact.
As a business, a winning streak, a larger-than-expected run in sales shall we say, may unwrap an emotional response, though should be controlled and not entice a bout of overconfidence. The winning streak, the business revenue, is there to cover future expenses.
How you treat trading can affect the way winning and losing streaks are analysed.
As a hobby trader, a winning streak may cause an exaggerated feeling of elation, a euphoric state. This results in overconfidence, a bias which has consequences in trading. While largely affecting hobbyists, this can also influence professional traders, too.
The euphoric state tends to blanket fear and create an illusion of control. As you might expect, overconfidence commonly has traders seek trade setups outside of their usual approach (for professional traders mainly as hobbyists often trade void of a plan), and assume larger position sizes. Additionally, overconfidence can unlock the door to overtrading. The latter can also be seen when a trader experiences losing streaks as well.
Traders with short-term thinking believe winning money is forever theirs. This is a mistake, as eventually, you will have to give some back to the market to cover expenses. Most professional traders (and businesses) understand this and will not be too overly attached to winning and losing streaks.
To not approach trading as a business is throwing money down the drain. If you’re in the fortunate position to pursue this as a hobby then more power to you. For the rest, approaching Forex trading as you would a business is the most appropriate solution.
Most believe to be considered a professional trader you must trade full time. This is incorrect. There are part-time traders, functioning as a business, who have other obligations, and still manage to achieve a positive return. This is the appealing aspect of trading the financial markets – the flexibility a trading career provides.
When you trade as a hobby, trading in the first few months is the honeymoon stage, so to speak. Everything is new and exciting. Reaching the six-month mark, nevertheless, most feel trading is not as fun as they thought it might be and usually search for other avenues of excitement. Successful traders, ones who pursue trading as a business, tend to have a growth mindset and embrace the challenge, persist in the face of setbacks, and see effort as the push to mastery.
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