Learning To Trade Like A Hedge Fund Manager (Part II)
Posted on July 26, 2009
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You must have read Part I of how hedge fund managers trade forex. You need to understand that hedge fund managers are always on their nerves edge. They constantly look for strategies that work.
Hedge fund managers aim is to make good money consistently while always on their guard because a trade can go bad any time. If a trade goes bad, they know beforehand how to get out of a bad position before it results in a huge loss. You as individual investors also would put your own money at stake in the hope of making good money.
Ranging and trending are two primary trading methods. Many hedge fund managers like to follow the trend. Dont forget the saying, Trend is your friend. If you want to become a trend trader, than you need to understand and anticipate trends that may develop in currency pairs. If you want to do range trading, you should understand what best times when currency pairs are ranging and how to do scalping and when.
You also need to decide the time frame that you will trade most. You should decide whether you will use the 5 min charts, 30 min charts, 4 hour charts , daily charts etc and why.
Will you only day trade or hold your position overnight? If you are doing a job, will you trade after hours? What time of trading best suits you? These things should be very clear in your mind before you start trading.
Learning the art of entry and exit is essential for your success. Should it be single entry, single exit? Should it be single entry, multiple exits? Should it be multiple entries, single exit? Should it be multiple entry, multiple exits?
You should understand the money management rules. Never ever put more than 1% of your equity at stake in a single trade. Learn to calculate the risk/reward ratio.
Now, test drive the forex system by back testing and forward testing. Back testing can be done on Metatrader and other platforms. Forward test your strategies on a demo account.
Open a mini account and try to test it live with a small amount of money. This way you will not lose much money but will be playing against your emotions.
Ultimately trading is all about developing discipline and controlling emotions. You dont get this feel in demo trading when you know nothing is at stake.
Now is the time to get intimate with your strategies. There are two main types of trading strategies”one has a high percentage of profitable trades in a number of trades and the other has a high profit factor per trade.
The key factor here is to know and find out what type of market environment your trading strategy performs well in and what type of market environment your trading strategy fails in. Because only then will you know what works under what conditions and what does not work.
Understand how much drawdown you can afford on your trading account with this trading strategy. You can establish a bench mark figure using a back test. Decide before hand how much drawdown is acceptable before you pull the plug out of the trade.
The last step of thinking or trading like a hedge fund manager is self reflection. Oftentimes we become so absorbed with trading that we do not notice the obvious.
This is why it is important to spend some time on a weekly or monthly basis to go over or reflect on your trading. You need to establish a certain ROI level for yourself and keep on tweaking your trading strategies until you start achieving that figure.
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