How The Hedge Fund Managers Trade Forex? (Part II)

By Ahmad Hassam

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 want to make good money while always on their guard if things go bad, how to get out of a bad position before it really hurts. You as individual investors also want to bet your own hard earned money in the hope of making capital gains.

You should decide whether you want to range trade or trend trade? Many hedge fund managers are trend following traders. If you want to become a trend trader than you need to become a master of predicting and anticipating trends in your favorite currency pairs. If you want to be a contrarian trader and range trade, than you should understand how to scalp.

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.

Learn the art of entry and exit. You will need to learn technical analysis for this. Technical analysis is essential for your success. Should it be multiple entry, multiple exits? Should it be single entry, single exit? Should it be multiple entries, single exit? Should it be single 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.

In the end, forex trading is all about developing discipline in yourself and controlling your emotions. You dont get this feeling in demo trading when you know nothing is at stake and you are under no stress of losing your hard earned money.

Get intimate with your strategies. There are two primary types of trading strategies"one that has a high percentage of profitable trades and one that has a high profit factor.

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.

Drawdown is very important. Know how much drawdown you can afford. You can establish bench mark figures using a back test for each trading strategy. Decide before you trade, how much drawdown is acceptable before you need to 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 good to spend some time on a weekly or monthly basis to self reflect on your past trading performance. You need to fix a certain level of pips per day for yourself and keep on tweaking your trading strategies until you reach that figure. - 23167

About the Author:

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Learn Currency Trading. First Trade Your Forex Demo Account!