When it comes to quick profits that can be made with the currency markets’ day trading, it seduces many traders. After all, they know that the biggest opportunities are where big moves happen. However, the majority of Forex traders have neither the self-restraint nor the tolerance needed for such thing. According to Jesse Livermore, a stock operator, money is made during the waiting part. Charlie Munger, Warren Buffet’s sidekick, says the majority of investors have an issue with waiting.
Besides the patience, these traders also need the skills to get these big moves, which are not the same as in short-term trading. When you’re a long-term trader, you need to take in the view, and take a position based on your conviction levels and handle your risk in an appropriate manner. How you enter is not so important. The position size and how the risk is managed, on the other hand, is important.
What kind of objective should you have?
Good traders should always have an objective for their trading strategies. In this kind of trading, the idea is to maintain a tight risk while building up a large position should things go your way and allow for a big score. The premise is to reduce the amount of negative exposure while also keeping ready for the big moves.
Have a macro theme to trade with
While it’s important to have a price action, it’s still worthwhile to purchase first and ask your questions later, and find out about the macro environment to guide any trading decisions. One way to do this is to create trading themes. For instance, short USD, long JPY, etc. If you see a chance to get long GBP or USD against JPY or EUR, get it. If there is a long JPY/EUR, allow it to slide, or trade it when it’s of a smaller size.
How you can minimize your risks
It may appear on the surface that it’s a good idea to invest in every good trade you come across. However, it’s not always the case. With too many trades to invest in, you could find yourself facing some difficulties, such as:
- You’re not as selective as you once were
- There are some synthetic positions in your hand
- You can’t manage your portfolio as well due to positions or mindset
The best thing to do is have a portfolio of no more than 10 positions. Five is a relatively good number. Reduce the amount of correlated positions to no more than three and have just two synthetic positions in your portfolio. Your portfolio does its best when the capital is focused on a minute number of large positions you carefully got into.
Set yourself up for the big moves
The weekly and monthly charts that you tend to ignore need to be picked up now. Look at the long-term charts to help you find the big moves.
- Find the weekly and monthly resistance and support levels
- Find the main psychological levels
- Find the double bottoms and tops
- Find the times of consolidation
How much risk should you put forth in each trade?
The answer depends on three key things:
- What’s the targeted win rate?
- What amount of trading opportunities do you think you’ll have?
- What is the risk/reward ratio on the winning trades?
In this kind of trading, there’s no reason to take on an excessive amount of trades – up to three trades a month is more than enough. You’re looking for a 30 to 40 percent win rate. Although there is a lower win rate, the profit per trade you get is going to be five to 10 times your risk. When you consider these factors, you need to limit the risk to one to two percent per trade. After you’ve gotten your first 30 percent in profits, you can potentially boost the risk, or keep up a low risk, scaling more aggressively.
You need to time your entry
Make sure your entry gives you two key things:
- Is extremely clear, so you can be decisive
- Keeps a low number of false signals to ensure over-trading is in check
Therefore, you want to wait for some type of entry signal on a monthly or weekly chart. You could place an entry on the daily chart. With multiple indicators, things can get a little complicated. You want things to be simple and find an entry that meets your criteria.
When you enter the levels, you want to wait until they are removed and the price rears back, which can be done on a weekly or monthly chart. With a low volatility break, your entry should be different. Wait for it and then close. When trends are going on, wait for the pull-backs and start the trend up.
When you should mark on the daily chart
A daily chart is necessary in some instances. In strong trends, there’s a time of low volatility on a daily chart, allowing to you to enter on the breakout.
If on a monthly or weekly resistance or support level, there’s an option to enter early on the daily chart, you should consider doing it. This allows you to take a smaller point with the goal of improving the risk reward by getting involved at a better price. Should the trade not turn into a weekly entry or near it, you can get out.