As time has gone on, several of our Forex Smart Tools owners have become very consistent and profitable traders. We stay in touch with many of them and recently received an excellent question from one of these traders. We wanted to share our answer with you…
Our answer has several stages because the development of skill in trading is sequential, even after you’ve gained proficiency with chart reading and trading.
Develop a solid trade history that you can show investors. It must show at least six months of continual trading on the same live platform. It must be a live account, not a demo. And six months is the absolute minimum. A year is a much more serious statement of your mastery - aim for that.
You don’t have to show profit every day or every week even, but the overall result should be solidly profitable. For an investor to take you seriously, your returns should not show significant drawdowns. (Please watch the 43 minute video we offer on this topic in the Core Trading Concepts section in our money management series for Forex Smart Tool customers, entitled “Evaluate the Stability of Your Trading System”).
The account you are trading must be live, not demo, because you must be able to prove to yourself and potential investors that your technique does not crumble when real money is on the line. Don’t kid yourself - there is a difference!
And six months is a minimum because anyone can have a short burst of great luck for even 2-3 months, and then suddenly take a margin call and lose everything. We’ve personally known too many people in this exact category. When you go for 6-12 months of consistency, you are proving two things to yourself and others: 1) your winning streak is more than luck and 2) different market conditions at different times of the year and in differing economic environments do not adversely effect your trading style.
Find one or two people willing to invest a small amount of money with you. Trade that for them for three months and see how you do. Be very careful to not increase the total amount of money you are used to trading in your own account by more than 3 times with this new influx of cash. In other words, if you are used to trading $5,000 for yourself in your own account, the total money you should be trading after the investment of others should be no more than $15,000. If you do well with this for three months, you can either accept more money from these same investors, or add one or two more investors to your pool and increase your holdings - but do not increase by more than 3 times the capital pool in any three month period.
Why do we say this? Again, we speak from personal experience. We have seen very good traders crash on the rocks when they went from trading their own money to suddenly trading money for other people, especially those who took on too much money too quickly. If you are going to take on OPM (other people’s money), you need to develop a unique set of muscles to be able to handle the weight of this responsibility. Please do not ignore this.
In this period of time, you can also work out how you will handle your customers’ accounts, what kind of communication you want to have with customers and a lot of logistics.
If you are an American citizen or plan to invest for American citizens, then once you start taking on other people’s money, you should register with the NFA. If you are trading less than $400,000 and for only 15 or fewer people, you can operate under exemption 4.13 of the CFTC guidelines and you don’t have to take any tests or pay any fees - just file the form to let them know what you’re doing. The 15 people count excludes yourself, your spouse, children, parents and siblings. The regulations change from time to time, so please refer to the NFA for specifics. Here is their link:
Now that you’ve tried out trading OPM, decide if this is for you or not. Not everyone likes this added burden, but others don’t mind it at all, and others find it even more exhilarating. Use Stage Two to discover your preference.
If you trade OPM, your clients become your boss in a sense though. If this does not appeal to you or the stress of having other people’s money is more than you want to live with, there are still smart ways to grow your own forex business. Divide your own forex profits each month and designate one portion as a salary and another portion to add to your own balance. With discipline you can live off your trading and grow it at the same time, so you are able to earn more and more with it over time.
If you do enjoy having clients, there is no better way to leverage your money. Let’s take an example. Let’s say you can consistently make 5% a month from your trading. If you have $10,000 of your own money to work with, that’s a gross income of $500 a month. If you have an investment pool with clients’ funds of $400,000 (the NFA exemption level), and you take 25% of what you make for them, then doing your SAME style of trading and making 5% a month now delivers $5,000 a month to you - for the same work. ($400,000 x 5% = $20,000, x your 25% take). Ten times the money from the same about of work. Let’s extend the example...
If you register as a CTA with the NFA (a few tests, a lot of paperwork and a fee, but it does open doors) you could increase your pool gradually over time. The same math can then extend… a pool of $2,000,000 with a 25% fee on profits would yield you $25,000 in that same month you were making $500 trading your own money. That’s leverage!
Working for a bank or another firm? Well… that’s up to you. For ourselves, we got into trading forex because we were tired of having bosses…