Trade Better Outside Your Comfort Zone
08/16/2012 10:00 am EST
The staff of Netpicks.com explains how, just like investors playing long-only markets, traders would do well to diversify their strategies.
Sometimes in talking to traders you hear things such as “I trade the Dow” or “I trade the Nasdaq.” These traders focus their attention on one market. As well, they will usually call themselves either a scalper or daytrader. There is nothing wrong with keeping laser focus on a particular style or market...but I fear some are missing out on some solid opportunities.
I started my trading career in the currency markets—retail Forex to be exact. It had a low barrier to entry, and there was a ton of “trading education” surrounding it.
Daytrading these markets can be a test of patience at times. Toss in spread costs and news releases that add crazy whipsaw at times, and it can also be a hazard. There was an article published last year that stated at one of the biggest brokers, 77% of traders lose money each quarter. How about this stat where Gain Capital stated they make average $2,900 from each active trader and the average account was $3,000!
There is no rags to riches story I can share with you. I didn’t blow out accounts only to find the grail. With modest goals and understanding the pitfalls, I stayed away from that 77% group.
Still though, I was not fussy on paying what I was to get into a daytrade, considering futures was a lot cheaper. I started to pay more attention to high risk-reward swing trading setups because it was more cost-effective. Since currencies generally have some nice swings, I wanted to spend more time looking for swing opportunities and less on daytrades.
When I was presented with trading a futures market in a stock index, I didn’t lose sight of swing trading. It occurred to me that I could trade for income in the futures market and look for a more “capital growth” approach in the FX swings.
Here is a very recent example. This screen capture below is a short trade taken on the EUR/USD currency pair on August 7. The initial risk on this trade was 25 pips, and I was looking for a 166-pip target. There was a scale out at 1.2344 which banked 83 pips.
As you can see from the graphic, price just missed hitting the profit target. After this screen cap, I did lower the stop to 1.2330 to lock in profit (an extra 97 pips), but price did fall to the full target on August 10.
Trading offers all kinds of opportunities to make money. The issue is that many traders are fixated on one approach. By adding diversity to your trading business such as swing trading, you are able to passively reap the rewards that come with the bigger moves.
If you happen to miss a day in your daytrading, you do not adversely affect your bottom line if you have diversified. As well, diversity has the ability to keep your overall risk capital equity curve in a favorable trend if you are taking the correct approach.
Once you have found success in one approach and can fit in another, you may want to investigate adding some variety to your trading business. If done correctly, it can boost your bottom line without too much extra effort.
This article was written by “Coach Shane" at Netpicks.com.