The difference between a professional trader and an amateur trader is that a professional trader never goes into a trade blindly. You see hedge fund managers have to show good results to their investors in order to solicit their investments into their funds. Hedge fund managers have to convince their clients that they have a battle tested strategy.
As individual traders, our $20,000 trading account is as important as any $20 million hedge fund. Our $20,000 account is more important. We are using our own hard earned money on trading. A hedge fund manager is most probably trading with other peoples money.
Hedge fund managers follow a step by step process to develop and test their currency trading strategies. Over the years, currency trading has become an important part of their investment portfolio. There is no reason why we as individual traders should also not follow that step by step process to develop out own trading strategies.
One thing should be clear; every trader has to find his/her own edge. We can learn from others. But in the end, it is our own methods and insights that will make us succeed as forex traders in the long run. Lets discuss the step by step process of developing our own trading strategy like the hedge fund managers.
Properly define your trading strategy. Every hedge fund manager like every trader follows a different methodology. Some use fundamental analysis. Other use technical analysis.
The first thing that you need to figure out is the style of trading that best suits you and what type of trader you are. Are you a short term trader like most day traders? Are you a long term trader and want to swing trade or position trade?
Decide whether you want to trade based on fundamentals or technicals or a combination of both methods. Hedge fund managers develop their trading strategies by defining clear cut trading rules, coding them and making detailed rules. This helps them avoid the pitfalls of emotional trading.
Trading based on emotion is dangerous and can and will ruin you as a trader. Make your forex system rule based to make your trading as unemotional as possible.
You need to decide whether you want to be a news trader or you will use technical indicators in your trading. You need to pick a few currency pairs and become master of their behavior. Not all currency pairs are created equal and you need to focus on only a few to become a successful long term trader.
Every currency pair requires a different trading strategy to succeed. You need to understand this. Some strategies work best on one currency pair but dont work on others. Read more in Part II of this article how hedge fund managers develop their trading strategies.