Here are some measures that are recommended to put in place to win this FX marathon.
There is no point having huge swings in your equity and lose it all in one day. This is a marathon that tests your patience and you lose the game once you lose your patience.
- Play defensive by cutting losses fast to protect your capital, your profits will take care of itself.
- You can afford to skip trades you are in doubt.
By doing so, you improve your probability of success. Many times, we take trades which you are not very comfortable but you still take it because you do not want to miss out. In fact, when you are in doubt, most of the time, you are right in not entering.
- Where you enter a trade determines how long you can hold a trade.
If you believe that price is going to move significantly, you will set a take profit level far away that will allow you to capture the whole move. However, many times when you do that, you get stopped out. In normal swings, price moves higher but retraces back to the level where you have entered, at times, it retraces further and stopped you out but moves to your anticipated level right after that. This happens many times and there may be a few explanations. Firstly, your stop loss is not placed at the right level. Secondly, you did not enter your position at critical level. If you intend to capture huge moves, make sure your position is entered at a critical level or your stop loss is well placed so you wont be stopped out.
- Monitoring correlation is important
If you are interested in long EURUSD but EURJPY is giving you opposing signal, you better be careful. Correlated currency pairs will often move together to a certain degree so you need to check on such pairs before you enter a position. By doing so, you increase your probability of success.
- Weekly/daily highs and lows will give you information to direction and momentum of your trade.
You only want to take long positions when price is moving higher on a weekly and daily basis. You do not want to attempt to long when price is moving lower on a weekly and daily basis since your probability of success is much lower.
- Take note of critical levels and round numbers
- At any one time, hold at most 3 trades.
There is a tendency for you to enter into trades whenever a trade setup appears. At times, when you may get a few trade setups which get you into positions. If your trades turn out well, the returns will be splendid since there is a likelihood that the trades are correlated. However, in the event that trades do not work out, you risk losing all your positions and that will lead to sharp draw down. For my case, if i have 5 positions which go against me and each position risks 0.5%, i will risk 2.5% of my equity on correlated positions.
- Set a monthly cap to your permissible drawdown
This measure is to prevent losing your equity fast when you are losing many trades and losing rationality. For our scenario, we allocation 0.5% for each trade, we set a cap of 7.5% maximum drawdown each month.