Forex Brokerage: Need a business plan before you start

It is very strange and at the same time surprising to see that many entrepreneurs who wish to set up their own forex brokerage, seldom bother to conduct a serious business plan, usually have no idea from where they are going to solicit clients and don’t know whether they are going to be regulated or not, and which jurisdiction.

It appears that the main reason for deciding to enter the forex business is “because the guy next door is making tons of money.”

Just because the forex market has a daily turnover of $4 trillion and so many brokerage firms are making millions every day does not mean that just about everybody can enter the forex business but more importantly survive. Competition is cut-throat and there is no room for error.

As we have mentioned in previous articles, the first thing to do is decide from which jurisdiction one is going to get the license to operate as a forex brokerage firm. It can be an EU jurisdiction like Cyprus or one of the offshore jurisdictions like BVI or Cayman Islands.

If the forex brokerage startup decides to be regulated in the EU, this means additional costs since all heads of departments need to be licensed persons, and for every service for which the forex brokerage has applied for licensing, it will need to have qualified staff, operating manuals, rules and procedures and the necessary capital. This means huge expenses which would range between EUR 350.000 to EUR 1 mln annually.

If one decides for an BVI or Cayman Islands license, the application process will still cost between $20.000 to $50.000, but the annual expenses will be significantly lower since offshore jurisdictions don’t require for the forex brokerage startup to employ qualified persons, or follow manuals on how it runs its business and there is one minimum capital requirement for all sorts of activity.

The choice of jurisdiction will decide in which geographical areas the forex brokerage startup will be active. If one has decided to be regulated in the EU, then the forex firm will be allowed to be active in the EU27 and beyond, whereas all those who have BVI or Cayman Islands license cannot legally operate in any of the EU27 member states.

Forex brokerage firms face very tough regulatory issues before being allowed to solicit business from US citizens while a number of countries such as China and India have banned forex trading on margin and leverage.

For this reason, it is very important for the forex brokerage startup to prepare a business plan as to  where it wishes to be based and regulated, which countries and geographical areas it wishes to be active and whether or not it will be violating securities laws or not.

Combining Forex Brokerage Startup With Forex Managed Accounts

Entrepreneurs who have decided to setup a forex brokerage should seriously consider combining their newly setup forex brokerage with offering forex managed accounts as a guaranteed way to generate volume and thus make sure that they will survive in the very tough and competitive forex market.

Suppose as an entrepreneur you have raised the required capital, hired the professional managers, traders and have a well organized back-office in order to become a forex brokerage, licensed and regulated by an authority in your home country or an offshore jurisdiction and you also have marketing plan to attract clients who will start trading through your platform, but does this mean that your brokerage will generate sufficient volume to cover your costs?

Probably not, which is why every new forex brokerage startup should seriously consider combining retail trading on client orders with forex managed account trading.

Getting volume from retail clients who decide for themselves how to trade, and when to enter buy/sell orders is probably a sure way to making money and is the preferred way of trading for most forex brokerages.

There is no risk on the forex brokerage since the client takes the decision and if the client loses money, the forex brokerage is not responsible for the loss. In the meantime, as the client trades in and out of positions, the forex brokerage keeps making money from the spread charged to the client.

The next question that we should ask is if the retail accounts are funding their forex accounts with decent amounts and thus generating sufficient volume or if they are small accounts, hoping in and out on 1-5 lots, which over several thousand accounts will be substantial, but until the forex brokerage startup reaches that stage, it may take time while the expenses are running.

So what should the forex brokerage startup do until it builds up such substantial client base to generate sufficient volume to cover costs and move into profit? The best and quickest way is to also offer forex managed accounts.

By offering the forex managed account service, the forex brokerage startup will make sure that a professional fund manager will manage the accounts and start trading positions with the objective of generating satisfactory profit for the participating clients based on a forex trading system.

In the process, the daily in and outs will generate sufficient volume, hence adequate spread income for the forex brokerage to cover daily expenses until the retail business picks up, while additional income will be generated by charging an asset management fee and performance fee on the positive performance generated from the forex managed service for the forex investors.

Fund Management companies usually charge a 2% asset management fee and then apply a 20% performance fee on any positive performance, which may be substantial and can generate such fee income to convince the forex brokerage to concentrate more on forex managed accounts, rather than chase small retail clients who trade in small lots.

Forex Managed Accounts boost daily forex volume

There are millions of individuals who have opened forex trading accounts and are placing buy/sell orders and making trades in the market and thus contributing to the phenomenal increase in daily forex volume, but the bulk of activity is generated by Fund Managers who have been entrusted with the management of forex managed accounts.

According to the Bank of International Settlements, the daily volume of forex trading surpassed $4.1 trillion a day. The report, which is published only once every three years, is useful since it highlights the phenomenal growth of the forex market.

The forex market is the market through which all global trade activity is made so it’s no surprise that the daily volume is so high.

An important part of the market however is also related to trading or investing activity, the bulk of which is carried out by institutional fund managers as opposed to the retail speculators who hop in and out and trade small lots.

There is no doubt that the majority of investors who wish to trade in forex prefer managed forex accounts handled by professional forex fund managers who use a combination of fundamental and technical analysis tools to trade in the forex market.

There are many who question whether a small retail investor can survive in the forex market. In fact many forex firms who have the license to act as marker makers that is they take the risk and never cover client positions have based their business success on the failure of the retail investor.

The reasoning is that eventually, the retail investor will lose his money because retail investors are not sophisticated, they are not disciplined and they trade with their heart rather than their brain.

An increasing number of market makers thus increase the leverage offered in an effort to convince the retail investor to trade bigger amounts and thus increase the chance of losing the original capital invested.

On the other hand, a professional manager is more likely to use sophisticated technical analysis tools, have access to the latest news and comments hitting the newswires and which are likely to have a major impact on prices and equally importantly trade based on discipline and risk management tools.

 
This is why more and more investors are shifting to professional fund managers, especially those employed at regulated investment firms, giving them the mandate to manage their forex accounts.

Forex Managed Accounts: Automated systems vs. humans

Forex traders face the stark choice of whether or not to entrust the management of their forex accounts to automated trading systems or leave it to the fund manager to trade on the account based on his hunch and trading experience.

In recent years, automated trading systems have sprung up and a Google search will bring up a host of systems promising heaven and earth, massive profits and a sure ticket to happiness and fortune.

But has life become that simple? Definitely not. Most of such automated systems promising high returns are back tested models, meaning the performance is tested backwards on a mix of currency pairs until the desired profit performance is achieved after which the marketing teams go into action.

When the customer signs up for the automated trading system, the actual performance usually does not match the previous performance, which is why investors should listen to the trusted warning that “past performance is not a guarantee of future performance.”

This does not mean that all automated trading systems are marketing tools to suck in unsuspecting investors. There are many systems which deliver good results. By far the most popular automated trading systems are the Expert Advisors, many of which are monitored by independent sites and their performance published.

Here as well however, there are a number of tricks increasingly used by the Expert Advisors or the sites monitoring their activity to boost performance whereby the pips made are reported as the equivalent of dollars, whereas in actual fact, the performance is a fraction of the reported amounts.

The Fund Manager on the other hand is usually bound to give an accurate trading history since in sharp contrast to the developers of the Expert Advisor systems, the Fund Manager is a licensed person employed at a regulated investment firm, as opposed to the EA developer who is usually a programmer, with good knowledge of computers and mathematical systems.

As for trading strategies, the automated systems are based on trend indicators, previous tops, bottoms as well as Fibonacci retracement/extension levels, daily pivot, MACD, RSI and so many other technical indicators. Since the trading signals are automated, they are very easy to fool, and many times, such systems get burned with false breaks, stops and then reversals.

The Fund Manager is also bound to use the same technical analysis tools, but is most likely to combine these with fundamental news, economic data, research and his gut feeling on every move in the forex market.

So when both enter a particular trade with predetermined stop and profit targets, the automated system is bound to wait until the actual levels are seen, but a fund manager can always act if he notices that the profit target or stop is close but the market is having difficulty in reaching it. The different approach could be a big factor in explaining the divergence in results!

Online Forex Trading Tactics your Key to Success

The Forex trading business is one of the most leading market trades known globally today. Its 24x7 running schedule for all the weekdays stands it apart from all quarters. Furthermore, with the introduction of the Online Forex Trading business is nothing less than an icing on the cake. It has offered the masses from the farthest corners of the globe with an opportunity to invest in Forex market. Online Forex trading is surely the best trading opportunity to acquire reasonable proceeds with a small investment.

How to run Online Forex Trading business?

Online Forex trading can be easily worked on from your home; all you need is a computer with an internet connection. To start off with forex trading, you require to do is complete the registration procedure for your connection to access the world’s biggest trading market. Online Forex trading primarily engrosses forex currency transactions which increases the liquidity factor.

Advantages of Online Forex Trading:

• The liquidity content in the forex market helps the forex traders a lot, which works as a sign for price stability.
• In Online Forex trading there is no possibility of commission for which a trader can happily work on without any extra expenses.
• Investing in the online Forex business comes back to you as an additional source of income which in turn assists the professionals in taking online Forex trading as their part time.
• Online Forex trading offers the traders with the highest profit, hundred times of your initial investment.
• Traders can easily operate from their homes without worrying about the hassles of traveling.
• Forex Practice Account has become a great tool for novice traders to check their Online Forex Trading capability and competency to carry on with the business.

Online Forex trading has come far beyond as a trading opportunity and is quite safe when compared to the related trades. All you need is a small amount to invest initially to begin with the business and earn huge profits more than the currency invested. You can get nearer to a new destiny if you are devoted with online forex trading business and can enhance your business speedily.