Would you like to partner with an FX
trader who is logical, unemotional and who tirelessly looks for trading
opportunities?
Many traders are attracted to automated
trading because they can partner with an FX trader with the above
characteristics through automated trading. This article will help traders
identify an automated strategy that is a good D-E-A-L regarding higher probability
trading.
Let’s get started with the 4 step checklist. In my
opinion, a strategy is a good D-E-A-L if it can positively answer each element
of this acronym:
1.
Description
2.
Entry/Exit Signals
3.
Application
4.
Leverage
A positive result in the 4 items of the checklist is
no guarantee the strategy will be profitable…nobody knows what the market is
going to give in the next minute, let alone the next day, week or month.
Therefore, the objective of the 4 point checklist is to properly identify and
implement a forex automated strategy by utilizing appropriate leverage and
performance expectations which results in higher probability trading.
Let’s unpack each element of this acronym.
Description
The first thing we should look at when considering an
automated strategy is the description of the strategy. Find out what the
strategy does and the general logic behind the strategy. Look for
buzzwords such as - stop loss, profit target, risk to reward ratios, risk,
breakout, trend, momentum, range.
By carefully reading the description, the first thing
I want to identify is what type of market condition this
strategy is intended to be used in. You see, strategies are designed to do well
in only certain market environments. Strategies that can do well in ALL market
environments are very difficult to come by.
Therefore, one way to bring realistic
expectations is by determining what type of environment the strategy tends
to do well in, and then apply that strategy to a market exhibiting the same
condition. (More on this in the APPLICATION section.)
Entry/Exit Signals
Many traders spend the most of their time agonizing
over the strategy’s entry and exit signals. It is important to understand the
general logic behind the strategy, but we don’t want to over emphasize each
trade the strategy makes. After all, this strategy will likely produce hundreds
or thousands of trades. Therefore, it is the collection of trades
generated by the strategy that we are interested in and not each individual
trade.
In essence, look at the trade performance as a basket
of trades rather than based on each individual trade.
Here are a couple of ways of reviewing trades.
1. Place all of your winning trades in a basket and
all of your losing trades in a basket. What is the average winner? What is the
average loser? Seek strategies with higher average winners versus
average losers.
2. Review the trade performance in baskets of 10
trades. Take a look at your last 10 trades, did the net result add pips to your
account or take them away? Seek strategies that add pips in a basket of
X trades.
Application
I mentioned above how we want to use the DESCRIPTION
to determine the market condition the strategy is designed to thrive in. Once
we identify the market condition, we then seek out a market that exhibits that
characteristic. This step is often overlooked by traders.
There are generally 2 different types of market
conditions with several variations. Today, we are only going to concern
ourselves regarding trending markets and non-trending markets
(often times called ranges).
These 2 conditions are exclusive of one another. When
the market is in a trend, prices are making progress. You will see a series of
higher highs and higher lows in an uptrend and a series of lower highs and
lower lows in a downtrend.
On the other hand, ranges form when the market is not
making progress in one way or the other as the market trades sideways. There
are many reasons why trends and ranges development which is beyond the scope of
this article. All that we need to be concerned about here is to
identify which type of condition our strategy ideally thrives and then find a
market that matches the same condition to trade this strategy.
If you are not sure what condition a given currency
pair is in, there is a Weekly Strategy Outlook article written in
DailyFX that provides guidance for you.
Leverage
The last point of the 4 point checklist is leverage. This is another commonly overlooked
area by automated forex traders. Many times, I’ve found that traders will
generally utilize a good strategy, but they simply expect too much
from it and therefore apply too much leverage. This is generally caused because
traders are looking at the upside to the strategy and not planning for any
potential losses. To help keep your account capitalized through such drawdowns,
it is important to use conservative amounts of leverage or none at all.
If you are a conservative trader, consider using
even less leverage at 5 times or smaller. The benefit to using smaller amounts
of leverage is that when your strategy experiences drawdown, you are risking a
small portion of your account and therefore would have more capital left to
trade than if you used large amounts of leverage.
Participate in higher probability trading by
incorporating the 4 point checklist above. This will help you properly identify
and implement a forex automated strategy by utilizing appropriate leverage and
performance expectations.
Happy Trading!
Source: http://www.dailyfx.com/
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