Making the FX market work for you

Top tips from those in the know

1) Develop a strategy and stay disciplined

'Have a strategy for how to enter and exit your trades, and stick with the discipline which you have set out,' says Saxo Bank's Nagle. 'Discipline simply means following the rules,' adds Jadeja at ODL Securities. 'If you think this is where your stop should be, don't sit there and think “I'm going to get out” – physically put the stop loss in as an order.'

2) Keep enough in your account…

While brokers like CMC Markets will allow you to open an FX spread betting account with as little as £200, the big shifts in currencies mean £1,000 is a more realistic starting point, says Hughes. 'You will never go into a trade and the market will continuously move in your favour all the time – you will lose at some point and you need to have the money in your account to cover those losses.'

3) …but play safe with small positions

Know how much of your capital you are putting at risk, and don't go above a certain percentage, says E*Trade's Sisca. 'Think about the size of the trade that you're putting on – too many people will put on a position that they're not really comfortable with.'

4) Get a 'boss'…

Not having anyone to explain themselves to anyone can make retail investors more reckless, warns Niv. 'If you look at professional investors, a lot of what differentiates them is that they have a boss. And that boss has rules. If they don't follow those rules they get fired.' Get a close friend on board and turn them into your trading partner, he advises. Sell your strategies to them in advance and get them to hold you to this.

5) … and always keep a diary

'We all have a skewed memory of how events occurred,' and it is even easier to lie to yourself if you don't write things down, says Niv. So keep a trading diary, briefly recording every trade you make, what you were hoping to achieve and why you did what you did –and refer back to it to help you learn from your mistakes, he advises.

6) Go for long-term returns…

The bigger – and more consistent – money is often made on longer term plays, says Jones at IG Index. 'Try to catch a move over days and weeks, rather than over seconds and minutes.' Traders with an equity background often make the mistake of picking overly short time frames with FX, but would be better sticking to hourly or daily frames, says Niv. 'Think of FX like an oil tanker. Stocks are more like speed boats. They turn faster and you can't really predict which way the waves are going to take it.'

7) … and don't over trade

'The job of a trader is not to trade – it's to make money,' and just because you have all the trading tools and data at your fingertips doesn't mean that every day is the right time to use them, says Sisca. 'The best traders that I've seen are the ones that are very selective in their position taking,' he says. 'When they see a good idea they will have the confidence to be really aggressive with it, rather than be tentative because of the cumulative effect of all these small losses they've taken when there's nothing to do.'

8) Stay away from data days…

'Try not to trade around non-farm payroll day, the first Friday of each month,' says Hughes. 'That tends to absolutely cause havoc in the FX market. You will see massive moves all over the place.' Trading on an economic report, 'even if you have the strongest feeling in the world … is akin to gambling,' says Sisca. 'When the numbers come out, let the dust settle a bit.'

9) … unless you're an intra-day expert

'If you're trading intra-day, then the news announcements are key to trade that momentum,' says Deutsche Bank's LaScala. And if you do want to put on a short-term play, watch a 15-minuteprice bar before the announcement you are trading off is made, and place an order on either side of the bar's high and low, says Jadeja. 'You are saying if it breaks the high I will buy it and put a stop at the low. If it breaks the low I will sell and put a buy on the top side,' he says. 'You can make really quick money – but you've got to be so quick to close the other order off.'

10) Tailor your trading to your personality and lifestyle

'Remember to trade in a way that suits your personality,' says Nagle. 'Not everyone has the ability to sit and watch a losing trade for extended periods, so tailor your trading strategy to accommodate your own personality traits.' 'Whatever strategy traders pick, in FX more than anything else, it needs to work with their personality,' agrees Niv. 'If you are a person who needs to do tops and bottoms because you're impatient and have to pick small profits, don't get into currencies that move a lot.'

11) Buck the trend

The minority always wins, says Niv. FXCM publishes a 'short-term sentiment index' measuring the mood of its customers, and regularly advises investors to trade against the general sentiment. 'At least 50% of people have to lose, directionally. And so if 80%of the people think the market's moving one way, then they have to lose,' he says. 'When sentiment turns extreme, and the majority thinks one way, you definitely have to go the other.'

©Taken from Shares Magazine Forex Feature 2008.