Understanding The Business of Forex Trading

In this article in Understanding The Business of Forex Trading, we are going to address other attributes, skills, processes and equipment that you'll need to utilize in your trading business. Trading is a serious endeavor to undertake, treat it with the respect and commitment you would give to any other profitable business.

Equipment

Fortunately, the equipment required to get started in online forex trading is minimal and easily accessible. You can get started with any home computer and an internet connection. Just download a free trading platform, sign-up for a demo account and away you go! Do you need more than this to really be successful in trading? Theoretically, no, but you may find that certain tools make your trading life easier and can be treated as a business expense if you're making a profit.

There are lots of different software trading platforms out there now, some are free and work well, but it's worthwhile trying a few different ones to see if they give you more relevant information, are easier to use, or just have a better "feel" about them. If you require automation in your trading, then make sure you choose a platform that supposes this. Metatrader is a good "free" choice, but I personally find it a bit cumbersome and "clunky". It doesn't seem to react quickly when I want to make a quick trading decision - but it is full featured and does support automation. You might also like to try platforms like eSignal and TradeStation which are highly respected by professional traders.

A reliable and fast internet connection is a must for serious trading. It's good to have some sort of backup connection too, in case you're left stranded with an open trade and you need to close it out of monitor it closely. If your cable or ADSL internet connection fails, make sure you have a dial-up option too. Even dial-up will be fast enough to get logged in and close your trade in an emergency.

A large screen (monitor) is just about essential, and you may even consider multiple monitors. A professional trader rarely watches just one chart, and the more screen real estate you have, the more information you'll be able to show, and the quicker you'll be able to absorb the information that is presented. And, it's not just charts that you'll be working with as a professional trader, there's a good chance you'll also be viewing and using:

• Fundamental (news) information

• Spreadsheets or trading log software

• Forums or social networking websites to interact with other traders

• Other supporting documents such as strategy instructions and checklists

• Calculators or other tools for assessing risk and managing your trades

Make sure your trading workstation is set up in a place where you can shut the door and focus on the task at hand without distractions. A home office is ideal but trust me, trading at the dining room table on a laptop with 5 kids around is NOT optimal.

The Right Knowledge

To become a successful trader in the long term, there's a lot to be learned. You'll need to understand:

• Basic trading terminology, such as: bid, ask, spread, margin, long, short.

• Other trading basics: Stops / targets, Candles/bars, session times and chart periods.

• How moves the market and how it works.

• Technical analysis concepts such as: support & resistance, indicators like moving averages, MACD & stochastics. Also have basic knowledge of the use of pivot points, fib levels and candle patterns.

• Fundamental analysis concepts: Learn about how news affects the markets and why a certain news announcement can move the market in a certain direction.

• Probabilities. You'll need to assess your trading success over the course of LOTS of trades. Learn about probabilities, risk/reward ratios & win/loss ratios.

• Risk management and money management. To stay in the game for any length of time, you'll learn that it's a matter of building your account slowly, with minimal risk.

• Trading psychology. Learn about fear & greed in trading, how our emotions can affect our decisions on when to enter and when to exit.

• Last but not least, you'll need to learn a number of different trading strategies that you can prove to yourself are profitable. This takes time and trial & error - to find the right strategies to suit your trading style and that you are comfortable and confident with.

You can learn many of the basics of trading for free. Sites like WinnersEdgeTrading.com provide a great resource for traders both new and experienced, and the majority of the information is free. You can also practise and hone your skills for free, building experience by trading a demo account.

There are times when it's worth investing some money to learn from those who are more experienced than you though. Profitable, workable strategies can take quite a bit of time and expertise to develop, so it's logical that a good strategy will cost money. Proper mentoring can be a great way to accelerate your learning curve too - seeing exactly how an experienced trader handles different market conditions and being able to get questions answered on the fly can be extremely valuable.

Financing

If you're making a consistent profit month after month, even if it's a small profit, you may consider borrowing capital for your trading account. The amount of income you can earn through trading is going to be heavily dependent on how much capital you have available, so borrowing some of your trading capital can dramatically increase the amount you can earn. This is called an investment loan and you can generally borrow up to 50% of your investment.

Beware though, if you're not consistently profitable you could get yourself into big trouble if you're trading money you don't even own. You should have at least 24-36 months of trading history where you can show consistent profits before you even consider getting an investment loan. Interest rates are generally higher than say a home loan too, you'll need to make sure you're earning quite a bit more through your trading than you're paying in interest.

Trading as a business means you'll be declaring your trading income on your tax return, but if you've borrowed some of the trading capital you should be able to claim the interest on the loan as a tax deduction too. In other words, the interest that you pay on the loan can offset your trading income, which can reduce the amount of income tax you pay.

Dedication / Commitment

When first discovering trading, the dollar signs may start flashing in your eyes. It seems like a fast and relatively simple way to make unlimited profits. Yes, the potential is huge but don't underestimate the amount of dedication and commitment that you're going to need to put into the trading business too. Don't expect to be rich in 3 months or even 12 months. Your first goal in trading is to NOT lose money. Once you can trade and not lose money over a period of time, you can start to concentrate on making profits - small at first, but increasing over time.

Professional forex trading requires a long-term commitment. It's going to be hard work, but the journey can be very enjoyable and rewarding. If trading is something that you love and you believe you can apply yourself to over a long period of time, then the chances are good that you can win the war and beat the average Joe. In trading, when someone makes a profit it means someone else has made a loss. You are going to need to be smarter, more disciplined and more committed than the majority of other traders in order to make a business out of your trading.

Ongoing Education

Once you've learned how to trade and you're building your trading skills, the learning does not stop there. It's an ongoing process, there's always more to be learned and the more you know, the better trader you will become.

You'll be able to refine your existing strategies, incorporating newly found knowledge. You'll learn more advanced technical analysis skills such as Elliot waves and time-based analysis. You'll learn new strategies that suit your trading personality and can improve the performance of your trading, and require less time in front of the computer to make the same or greater profits.

There's always more to be learned in the areas of discipline and trading psychology too - all these things help you become a better trader.

Accounting and Accountability

Any successful business monitors its spending, its income, and its overall performance on a regular basis. Businesses generally use accounting software or at least a spreadsheet, to record and analyse the finances. To run a business without any sort of records would be reckless and in most cases, illegal.

Forex trading as a business should not be any different. Trading without suitable records is like spending money blindly. You'll ask yourself one day "where did all my money go?" and you won't have any concrete answers. By recording the details of your trades you become accountable for what you're doing. You can go back and analyse what methods are profitable for you and which aren't. To increase your trading performance and profitability, you'll first need to know exactly what it is, how you got there and how to change things to improve it. You'll need to know what your maximum drawdown was over the last 3 months or last 12 months. It's quite likely that you could have the same drawdown, perhaps multiplied by 2 or 3 times in the future. Can your account handle that? With this knowledge, you can bump your risk levels either up or down to ensure you stay in the game and increase your profits.

Knowledge is power, so in the business of trading, be sure you arm yourself with as much knowledge as possible. We're not just talking about educational knowledge, but also emotional knowledge and the knowledge about what trades you're taking and why you're taking them. I wish you well in this business, make sure you apply yourself with dedication, a thirst for knowledge, and also make sure you enjoy the process!