The Basics Of Operating A Low Maintanence, Limited Risk, (Relatively) High Growth Account

3 September 2016, 12:02
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Picking Pairs

  • Use discretion. Sometimes less is more, trading with a higher rate of accuracy (establishing that an accurate trade is a profitable one) means you can spend less time placing orders while generating more growth.
  • Tend to rely on the principle of "buy low, sell high" in relation to a 3 month time-frame. For example, if the Japanese Yen is trending relatively high on the 3 month time-frame and the Swiss Franc is trending relatively low on the 3 month time-frame then building a position long on the CHFJPY would likely become profitable at some point in the future.
  • Diversify. Expanding on the previous example of a long position on the CHFJPY, don't put all your eggs in one basket. This enables a trader to take advantage of somewhat random volatility constantly illustrated by the currency market thus utilizing liquidity to gain liquidity. For instance, if choosing to open a long position on the CHFJPY, also consider opening a position short on the USDCHF as well as one long on the USDJPY.

Managing Risk

  • Consider how much tolerance you have for losses. Considering this strategy is dependent on a traders general aptitude and competence more competent traders should feel more comfortable taking more risk while less competent traders should feel more comfortable taking less risk. For the included CHFJPY hedge example I'll use an appropriate loss tolerance of 25%.
  • Allocate maximum limits for leverage for each pair in order to limit risk. This can be done with simple calculations. Choose a pair and locate the nearest distant price opposite of the direction of the proposed position which you are confident the price will definitely not reach within a 1 year time-frame. Calculate the difference between that price and the current spot price (or your proposed strike price) and relate it to your risk tolerance. For example if I calculate a maximum downside of 7% on the USDJPY and I'm willing to risk a 5% loss on that position then I've established the limit of the size of that position as 70% of the equity in the account, determined by the simple division of .05/.07. Do the same calculation with the CHFJPY and USDCHF considering a maximum downside of 5% and a 10% risk each and the result is a position size equal to double the accounts equity per pair. Add the risk for all 3 pairs together and the result is 25%, exactly the aforementioned "appropriate loss tolerance" meaning no additional positions can be taken until a position is liquidated.

Technical Tactics And Strategy

  • Analyze the chart visualizing the multitude of plausible future outcomes. Scan for recent bullish or bearish signals on the 1-day and 1-hour charts. Consider using an indicator such as the Average Directional Movement Index (I like the ADX(13)) but maintain perception of the price chart as a priority.
  • Determine a functional lot size by dividing the equity allocation for a pair into a number of segments. For example, on the CHFJPY pair a position size of 100% equity was determined. If the account has $10,000 in equity we can determine a lot size of 1/4th of that, the equivalent of $2,000 or 0.02 lots.
  • Locate significant supports and resistances on the 30-minute and 4-hour charts and set buy-limits accordingly. For example, if the most local support for the CHFJPY is .005% below the ask price then set a buy-limit .004% on .02 lots.
  • Average down. Since this strategy already implemented risk management controls there's no need to worry about temporary losses, all a trader needs to worry about is his/her own incompetence. Continuing the CHFJPY example one buy-limit was set .004% below the ask, set 2 more buy-limits sized .02 lots: .006% down and .01% down from the ask price. Then with the remaining allotted .02 lot a trader can choose to buy at the ask or wait for a better price - or a better signal.
  • Set a take-profit limit. Depending on how much time you spend implementing the strategy or how confident you are in your position this can vary from local supports/resistances to YTD highs/lows or even higher/lower.

Sustaining Equity Growth

  • If a trader manages risk properly and utilizes discretion equity growth can remain consistent even after the account equity has doubled multiple times over.
  • Size up lots according to loss tolerance in percentage terms and keep that loss tolerance consistent even as the account grows. Instead of reducing loss tolerance as the account grows, withdraw it instead if you begin to feel uncomfortable with the sheer amount of individual dollars and cents at risk.

Conclusion

Many traders have proven that any person who learns patience and competence in analyzing price charts and executing orders can return a higher yield than the Dow Jones Industrial Average (DJIA) or NASDAQ with less risk consistently on a yearly basis. It only takes an hour a week, but optimally it takes around 2 hours a day to maximize returns using this basic strategy. Realistically a trader can achieve growth exceeding 10% per month with a maximum drawdown not exceeding 5%.

It's so easy that I've made a FREE signal that returned 7.2% in 2 weeks with a maximum drawdown under 3% - here's a link to it https://www.mql5.com/en/signals/217797

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