How to trade like a pro?
Step 1: Prepare a valid trading strategy
Every hedge fund managers follow their own trading strategies no matter what. Some may use only the fundamentals analysis method, while others may be able to construct systems by considering only the technical analysis method. The first thing you should do is to figure out what type of trader you are and the style you prefer.
All traders have different tendencies. Some traders may set the length of their positions on a weekly or monthly basis. On the other hand, some traders are trying to make a profit in a moment while competing against each other.
To construct a trading strategy, it is necessary to identify four major issues before trading in the market. Be sure to start the deal with a plan. Never think about making a plan after the position is opened.
A) Technical analysis OR fundamental analysis?
The first step to have a valid strategy is by determining whether your trading strategy is base on fundamental analysis or technical analysis or a combination of all of these. Fund managers who develop system trading strategies should establish and code the enter and exit rules. Not everyone can set up a computer language trading strategy, but there are many professional lectures and books to help.
The purpose of systemizing a trader’s trading strategy is an essential choice to exclude the trader’s emotional response from the trading strategy. The main reason for the failed traders is that they responded too emotionally to their trading strategies. Determining whether your trading strategy relies on the release of economic news (fundamental analysis) or technical indicators are the first step in establishing a trading strategy.
B) Decide currency pairs to trade!
The second step in establishing a trading strategy is to determine which currency pair to trade. The reason for this decision is that the currency pairs applied to your trading strategy do not have the same results.
The following two types of trading strategies are generally very widely known in the foreign exchange market: ‘Trend-Following’ and ‘Box Trading’. Due to the bias in the foreign exchange market, most hedge funds prefer to follow the trend. On the contrary, most individual investors prefer to make trading strategies that go against the foreign exchange market’s nature or trade-in the box.
It is not about finding the right answer or wrong answer in the selection process. Hedge fund managers narrow down the suitable currency pair candidates for the trading system to increase the probability of successful trading strategies. Plus, for Trend-following currency pairs, approach them with trend analysis, and box-type currency pairs should only stick to box-trading analysis methods.
Another consideration in establishing a forex trading strategy is that you should compare major currency pairs (MAJOR) and cross currency pairs (CROSSES) to choose one that fits your strategy. Major currency pairs such as EUR/USD and USD/JPY are susceptible to dollar movements, while cross-currency excluding dollars are generally less sensitive.
C) What time frame will you trade with?
The third step is to choose which time frame to trade with. When the foreign exchange market changes to another continental field, positions are organized in advance. This move can be seen, especially among traders who are sensitive to financial market news. They are keen to trade at fluctuating exchange rate movements, a few hours after the position is held and confirm their rightful position return.
The profit and loss structure of the trader fluctuates significantly due to large events that occurred over the weekend. To avoid such a significant gap between the closing price early Friday and the market price on Sunday, it is most useful to set up appropriate stop orders or exit before the weekend closing.
Step 2: Know exactly when to Enter and Exit
The majority of traders spend a great deal of time finding the optimal time to buy and sell. Use an optimal combination of strategies that takes both enter and exit into account would be a perfect match. Below are four top-priority options!
A) Enter Once, Exit Once.
This is a method to enter the entire position setting at a certain price and similarly exit all open positions at once.
B) Enter Once, Exit Multiple Times.
This is a method to enter the entire position in one price and liquidate separately. This strategy is usually a method of accumulating a certain amount of possible profit by taking advantage of a trend or support & resistance or breakthrough.
C) Enter Multiple Times, Exit Once.
This is a method to enter positions multiple times but sell all the positions at once. Traders who pursue this strategy prefer to lower the entering price or also called dollar-cost-averaging. If the market moves unlikely after entering the position, the trader with this strategy would enter several more positions to lower the entry price. Meanwhile, stop-loss or take-profit at once.
D) Enter Multiple Times, Exit Multiple Times.
This strategy is often used by trend-following traders. Usually, when the entry position is promising, the trend is considered to continue, and the evaluation price is raised. Liquidation is also carried out separately in a long direction.
In system trading or EA, entry and exit strategies are defined by coding one of the above four methods into the programming language. Manual traders also need to choose one of the four combinations that fit their strategy before trading.
Step 3: Backtest the strategy
Never start trading immediately without a backtest. Back-testing is a critical task for all traders. If their strategy model is not profitable base on past data, there is a high possibility that the strategy will not generate revenue in the future.
Most foreign exchange retail traders learn strategies research from their friends, non-experts called professional, books or trading instructors. However, no one should follow the strategy recklessly. Let’s make sure to make a habit of verifying the backtest and the forward test.
In particular, traders who are good at system trading should test strategic verification and evaluate whether they can generate profits using programs like Tradestation and Metatrader.
If you did backtest, you should do the forward test. One of the significant advantages of foreign exchange trading is that it is possible to make mock and mini-size trading accounts very easily. Testing trading strategies with small funds in forwarding testing is a critical task.
Because as soon as actual funds are injected into the trading strategy, the trader’s mind is in a very different state than before. To lead account management well, such trading psychology must be handled well. Managing one’s psychological state is more important than anything else.
Step 4: Get used to the strategy
A) Understanding Transaction Performance
When you are analysing the performance, there are two major methods to approach them. The first is to see the hit ratio or winning rate and the second one is to pursue a high-profit factor.
If the strategy has a high winning rate, the amount of profit and loss per trade are similar but because it is winning more frequently than losing, you are making money in the end.
The maximum profit-seeking strategy is a strategy that aims for a low winning rate but high profit when it wins, which can record consecutive trading failures. This strategy is mainly used by trend break traders, predicting trend breakthroughs in positions and placing very narrow stop orders.
The key here is to find out exactly what form of market environment the strategy fits well. Only then can we determine exactly when to stop trading.
B) Understanding the possible amount of loss
Risk management is too important in foreign exchange trading. Most people who start trading forex argue that forex trading is much more dangerous than any other investment. In any case, some of these views are right, and some of them are wrong. In the foreign exchange market, there are eight major currency pairs that are traded, making the foreign exchange market much easier to understand than other markets. Most people are mostly trading G10 currencies, so economic statistics and data are not arbitrarily manipulated.
On average, daily fluctuations in the foreign exchange market move only 1-2 per cent. Compared to other investment products, this fluctuation is minimal. However, due to foreign exchange tradings’ nature of using high leverage, the risk is much higher. Some brokers provide the influence of 1:500, in which 1% of the movement is amplified to 500%. Fortunately, leverage can be controlled by customers, and traders should actively manage risks accordingly.
Understanding MAXIMUM DRAWDOWN, which can occur in strategies, is of great help to risk management. Through this, you can decide when to stop or wait for trading. All professional investment managers are aware of the maximum losses incurred in their investment strategies.
For example, a specific strategy was backtested, and the MDD was -20%. If you remember this figure in your head, it is difficult to judge that the system has failed even if a loss occurs. If it reaches -20%, it will be a lot of worries, and if it comes to -25%, it will have to stop trading.
Step 5: Self-reflection
Traders are often so absorbed in trading that they forget straightforward facts. For this reason, it is necessary to invest a certain amount of time to review weekly or monthly reports.
We have to spend a lot of time on what kind of strategy the profitable trading was and why some of them failed, and how to achieve better results!