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The Order Of Setting Up Your FX Plan

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Old 17-09-2015, 16:13
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Default The Order Of Setting Up Your FX Plan

We recently looked at how to approach a trading pattern. First, we decontrcuted a trading pattern. Second, we discussed how to select the preferred currency pairs to trade behind the trading pattern.

Third, were to take a look at sequencing in order to help us put the process in the right order. Just like any good cooking recipe if you do not follow the right order or sequence then your process can be thrown off mark.

It may feel like were skipping some parts but in relation to the selection criteria mentioned earlier, we will skip over less important components that do not affect the overall pattern and likely subsequent move that were going to be focusing on trading.

Sequencing is a little-known method for approaching the trade from start to finish. This article will build on the prior two articles helping you to understand what goes into a trading plan. We started with deconstructing the big picture, selecting the best pairs for trading and ensuring that the edge remains and now will talk about the sequence of progress for a trading plan.

The Traditional Sequence of a Trading Strategy

The most common approach that a new trader takes is finding the right entry strategy. The reasoning is that if they know when to enter the market all their problems will be covered. Naturally, the perfect entry it is only known in hindsight however, there will likely be people telling you will find the entries for you.

If ever there was an important place to say buyer beware, the arena of people selling you perfect entry points is paramount.

Entry price is of course important. However, basing your strategy on entry price alone tends to lead to two key problems. First, overconfidence begins to see that and when a trader becomes overconfident, they tend to ignore the everpresent risks. Second, the overconfident trader often over leverages, which puts them at abnormal risk. Please note, over leveraging on an uncertain future is a recipe for destruction.

The Appropriate Sequence of a Trading Strategy

The simplest way to state the appropriate sequence of a trading strategy is that entry price pales in comparison to the importance of entry size. However, this is often seen as a boring approach. Many tout diversification as the key to market returns but diversification is a roundabout way of ensuring that a trader does not have all their eggs in one basket.

A key reason or trade size is that it allows for many inevitable mistakes that a new trader will make. Investing in foreign currencies is taking on a large market with a rather steep learning curve and you need to allow for mistakes in the beginning. Put another way, focusing on relatively small trade size allows you to be as Dan Ariely titled his behavior economics book, Predictably Irrational.

In short, the irony of markets and their traders is that the majority believes they are rational but few if any are. There have been many texts pointing out the pitfalls of the investorís mind but either way you slice it, traders in any market will often skew market input to favor the outcome that favors their survival or outperformance.

This phenomenon has led many traders to automate their trading strategy. Wall Street has had algorithmic traders also known as Quantís for decades now because they understand computers run on programs rules absent of predictably irrational traders. However, before you rush to code your own strategy please understands that the ability to turn on or off the strategy opens up the same emotional pitfalls. While many have automated their strategies to reduce emotional interference, trade size is still the better place to start to ensure longevity of the system.

In summary, in order to join or as some hope to be do beat the market you must first learn to survive the market. The best way to survive the market is to ensure you are not overexposed and anyone trade such that one outlier events takes you out of the markets enabling you to grow your accounts.

Happy Trading!



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