The Trading Business Plan and Risk Analysis
Updated: April 10, 2013 at 9:24 AM
One of the best things you can do as a forex trader to assure your long term survival in the business is develop a sound and objective trading plan and the discipline to stick to it.
Going through this important process will help you overcome the emotional responses to trading that have been the downfall of so many novice traders.
Once you have developed a good trading plan that you think you can trade in a disciplined way, another good idea is to put all of your trading-related plans and ideas together into an overall trading business plan.
Benefits of a Forex Trading Business Plan
Even if you have been trading for a while, but have not yet written down a trading business plan, you can still derive considerable benefits from doing so even now.
Producing a business plan will help you review and solidify your personal trading business activities and goals.
Another major advantage of having a business plan is that if your trading business plan still looks good after its initial testing and trading period, you might even be able to use it to find new investors to put money into your trading business.
Having more funds to trade with can help you access better trading spreads, information, customer service and ultimately, better and more profitable trading opportunities.
Components of a Trading Business Plan
Your forex trading business plan does not need to be complex. At a minimum, it should contain your forex trading plan, how you intend to manage any money invested, and a risk assessment of your engagement in the business.
Additional components of a trading business plan might include:
(1) What the competition is doing.
(2) Necessary start up and running costs of your trading business.
(3) The equipment necessary for your business to start operating.
(4) How you plan on running your trading activities in detail.
(5) How invested money will be held and managed within your trading business.
(6) What you plan on achieving with your trading business in terms of profits and meeting other goals.
(7) An overall risk/reward analysis showing that your trading business makes sense.
Most of the above trading business plan items are relatively self-explanatory; however the risk/reward analysis mentioned in item #(7) will be covered in greater detail in the following section.
Assessing the Risks of Your Trading Business
If you honestly believe that your trading business is worth pursuing, then it really cannot hurt to take a closer look at it from a risk/reward perspective. You can do this by assessing as objectively as possible what risks the business might face and what rewards you can reasonably expect to gain from pursuing it.
Furthermore, since some risks might occur with a greater probability than others, they can be weighted in a risk analysis according to their probability of happening. You can then multiply that weight by the potential size of risk involved to get a probability weighted risk exposure.
To get the overall risk/reward profile of your business, you would then sum up all of the risks and compare them to the rewards to see if your business makes sense.
Not only is such a business risk/reward analysis well worth doing, but it makes up an important part of your trading business plan that would ideally be created before you even make your first trade.
Many potential investors will want to see this risk/reward analysis information to help them assess whether your trading business stands a good chance of success for the risk you will be taking.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.