Day trading or swing trading can provide an ongoing income stream. However, before you can depend on making money in Forex trading, you have to spend a considerable amount of time learning all the aspects of Forex and be able to formulate your own effective trading systems.
In addition to developing techniques for positive short term trading, a good trader must also know how to properly manage his account. Money management, or risk management is a key factor in being profitable and traders should understand the risks that are involved in Forex and how they can still come out ahead. Anyone trading Forex must keep in mind that losing is not only part of the game; it is the primary part of the game. You will have more losses than wins with Forex but if you manage your money properly, your winning trades will be more lucrative than your losses and you will come out on top in the long run, See more on dailyforex.com. Effective money management means knowing how to react when your trading plan goes in the opposite direction to what was anticipated and you see your money slowly withering away. It means not allowing your emotions to take over, triggering the wrong moves at the wrong times.
Anyone investing money in any financial instrument knows that losses are a guaranteed part of trading. No system is full proof and no one wins 100% of the time. So you need to expect your trades to end up in a loss at least 50% of the time. And if one loss follows directly after another it can result in a sizable blow to your total portfolio despite the odds that the next few trades will be positive. There is no one to blame for these results. Short term trades are random and cannot be predicted. Forex markets are highly volatile and prices move direction quickly. We all make mistakes, interpret the figures subjectively and end up entering and exiting at the wrong time.
Equity Curve Trading
One way to protect ourselves from losing streaks is to use ‘equity curve trading’, a system employed by professional traders for many years and which has now become part of many auto-trading computers and robots.
Equity curve trading plots your ever-changing account equity against its own moving average. There are at least two basic ways to implement this idea. The most basic and commonly used method is to stop trading when the equity curve crosses above or below its moving average and to resume trading on a crossover in the opposite direction. You would typically stop trading when the equity curve crosses below the moving average if your system or method tends to produce streaks of wins and losses, so that when it starts to lose, it’s best to stop trading until it starts winning again.
If, on the other hand, your system tends to “revert to the mean” — after several wins, it starts to lose, and vice-versa — you would typically stop trading after the equity crosses above the moving average.
A more subtle method for implementing equity curve trading is also possible. Rather than starting and stopping trading on crossovers of the equity curve, you would reduce or increase the position size on moving average crossovers. For example, you might increase the position size for the currently selected method by X% when the equity crosses above the moving average. You might also decrease the position size by Y% when the equity crosses below the moving average.
Equity curve trading can be used in Forex to protect yourself from a continual losing streak while increasing your chances of profiting by placing trades at the right time.