Posted by forex at 12:13 AM
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1. Decide on the long-term trend of the market and institute short-term trades that follow the longer trend. Use dual moving averages to determine the long term trend when the faster average rises above the longer term trade. Back-test your results by trying many different variations of moving averages on a variety of currencies. Choose the combination of averages that perform best. Trendiness of the market can also be measured by indicators such as r-squared or the Chande Momentum Oscillator.
2. Choose the stochastic indicator as your short term buy and sell signal. Stochastic indicators get their trading strength from the fact that when stocks are rising they tend to close near their highs of the day and at lows they close near the bottom of the trading range. '%D' is the longer oscillator, while '%K' is the shorter oscillator. Buy when the oscillator (either %K or %D) falls below a specific level (e.g., 20) and then rises above that level, and sell when the Oscillator rises above a specific level (e.g., 80) and then falls below that level. You many also trade when the two indicators cross.
3. Use 5-minute bars for trading. Five-minute units eliminate choppiness and still capture short-term movement. One-minute bars would require a much greater number of trades without promoting any clear trendiness. There are numerous sources of data available through subscription websites or even the brokerage firm you choose. Practice paper trading (practice on paper without money) before executing trades in real time.
4. Employ a broker with online trading capability so time delay in execution is minimized. It also minimizes trading mistakes and provide better price execution. Shop around for the lowest execution cost possible. Remember that short-term trading involves high overhead costs due to multiple executions and slippage costs. Slippage is the difference between the bid and asked price. Thus, you will need a high win percentage to make money trading short term.
5. Choose a money management strategy appropriate to your trading style. You will not be able to maintain a large portfolio of positions. You will need to watch the screen closely as a typical trade may only last for a few minutes. Under no condition should you let losses exceed one percent of your total capital or ten percent of the capital of anyone trade. Money management must be ironclad and absolute or a market loss may turn into a capital disaster.