STRATEGY
-Entered a short-term trade and became governed by medium or long-term views.
-Let profits run as conditions altered adversely without reducing exposure.
-Did not follow a rule-based system such as using a stop- loss.
-Retained too broad a focus, (e.g. held too many
positions).
-Tampered with strateg y, e.g. by initiating a cross trade and taking off one side,
second-
guessing the original intent thus violating the strateg y.
-Used inconsistent risk/reward ratios governed by market developments, deviating from predefined risk/reward profile (e.g. originally looking for 2:1 and settling for lower or inverse ratios).
We found that most of these errors might be avoided by stripping out the human element of decision- making and improved upon by following rule-based systems that
correlated to the profit objective, e.g. an average 50% of the desired gain.
-Choose one or two currency pairs that have the highest probability of reaching the target.
-Exit the trade as soon as the target is reached, whether it is at a loss or a profit.
-Place trades on a reactive basis thereby reducing event-driven swings
define allocations by whichever method the trader or manager implements. For example, once a trade opportunity is identified, follow clear mechanics such as looking for a specific return on equity per trade, dependent on the market situation. Always use a stop-loss, even better use one that is
FX
where open positions are subject to knee-jerk reaction by the market at large, increasing risk of getting stopped-out.
-If the reason for placing a trade becomes invalid, exit the trade.
-Minimise event risk by closing or
reducing
positions over key data releases and weekends.
-Live to fight another day!
open
As with any other market, no component in part or whole of any such approach is guaranteed, yet experience gained over several different market cycles shared in this article could suggest that at
the very minimum, an awareness of these principles may at worst serve as timely reminders that we all need a strategy and at best might help combat some of the nervousness and tough days that have and always will be a part of the floating exchange rate world, with pursuit of capital preservation and conservative growth the underlying goals. Good luck trading.
Kevin Sollitt FX TRADER MAGAZINE July - September 2010 43
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