Treating trading like a business is an essential ingredient for successful trading in any market. When traders treat it like a hobby, they end up behaving and making decisions as if they are gambling for entertainment, like playing in a casino, instead of making good business decisions. Trading is serious business and should be approached as such. It is very important to make the distinction between trading and gambling for fun.
Like any business, there are costs involved. The goal is for profits to exceed expenses by a significant amount. Just like any other business, there are start-up costs, a learning curve, and day-to-day expenses. Since no trader always wins, losses are part of the cost of doing business. Obviously, to keep a business afloat, revenues must be much greater than losses, but losses are part of the process.
The costs of doing business as a Forex trader are not just negative trades. It is important to consider the commissions, taxes, computers and software, office equipment, and spreads that one will have to pay. Yes, it is true that the most significant cost will be losing trades, but if you make sure to take this into account when building a business plan, you will be better equipped to deal with those losses. Then as a trader, you won’t worry about them too much.
Forex trading success can take two main directions. First, the trader can either use a trading plan that has many more winning trades than losing ones or use a methodology where the winning trades are much larger than the losing ones. Of course, there are many different ways to achieve any of these possibilities. Experienced Forex traders say that the second path is much more realistic than the first. That is, they assume that even if they get the market direction right about half the time if they apply good money management they will be able to make money.
The risk/reward ratio is an important part of this equation. When the risk-to-reward ratio is 1:2, then one only has to profit from about a third to a half of the trades to have a profitable business.
Unlike most traditional companies, in trading, you have less control of the product. When one is selling a product or service, the quality of the product or service is the part over which one has the most control. Making the product or service the best on the market mitigates risk tremendously. It doesn’t work that way in trading. Here, the control that one has is in the decisions, the strategy, and the knowledge. The more one learns and understands the market, the better the decisions and strategy will be, hoping that these will lead to more successful trades. But there are no guarantees.
Just as perfecting a product or service requires keeping an eye on what’s going on in the world, so does perfecting your trading strategy. Constant learning, improvement, and studying the market are required to learn how to make the best possible decisions. When a trader approaches trading as a hobby, he is looking for a lucky break or two. Instead, as the owner of your own business, you are going to be looking for the best long-term strategy, where one or two lucky trades will not keep your business afloat.