Developing a Strategy

Target Trader

This strategy, if it works well, will appeal to all traders, but it was conceived with the small trader in mind that does not have huge capital and will be utilising the large leverage offered by the various currency trading institutions.  For more information on leverage you can read my article on leverage <u>here</u>. The main objective is to make a regular daily income with one’s capital protected.

Currency Pair

Money Management

Underlying Premise

The underlying premise to this strategy is that regardless of whether the currency pair is ranging or trending, during the course of the current day it is likely that the spot price will be equal to the mid price of the previous day, and if not at some time during the current day, then at least by the next day.  There are of course some occasions when this does not happen and on those occasions the goal is to lose as little as possible or turn the potential loss into a profitable trade.

Details of the Trade using my Midpoint Strategy

As early as I fall out of bed, I load the charts and calculate the mid point from the previous day.  I work from the hourly charts and if you check carefully you will see that the hourly and daily charts span a different time.  The daily charts that I use run from the close of the markets in the US whereas the hourlies show the close at midnight in the US.  I use the hourlies as they are about to close, or have just closed when I am about to enter my trade.

The above chart reflects the price changes until the close of the markets on Friday.  The high is 213.31 and the low is 210.33.  For the purpose of this article I will assume that there are no higher highs or lower lows before I place my trade. The mid point under this assumption is 211.82.  I will target that point and buy if the closing price is below or sell if the closing price is above.   I will use a hedge transaction to come into play if the price goes the wrong way.

Deciding How Much To Invest

I work with FXCM who offer a 10K package for an investment of $50 in the mini accounts, and I will invest 10% of my capital, so for every $500 I have in the account I will invest $50 and take 10K.  I will set my hedge transaction to come into play after 50 pips in the wrong direction, so my loss is limited to 10% of capital.

Managing the Hedge

I will set a stop on my hedge transaction at 30 pips, so that if it comes into play and the price reverses, it sells out, but another hedge transaction needs to be set up or the original transaction needs to be sold and a loss taken if the trend reverses again.  If the hedge transaction comes into play and is making a profit, I will set the stop to break even if the trend reverses but again careful monitoring is then needed.

Determining the Exit Point

I initially set the limit to the mid point, but if I am able to monitor the transaction, when the mid point is neared, I will remove the limit and set a trailing stop once the midpoint has been passed, thereby taking advantage of any further movement in the right direction.

Trade With Me

On a daily basis on weekdays when the trading station is operational, I will document and analyse my trade based on this strategy and we will monitor the success of the method.  The article should be posted by no later than 7:00 am GMT.

Written by: Denese Sinclair