Managing a Forex Portfolio

Managing, Forex Portfolio, Technical Analysis, fx trader, forex

28 Sep 2016

A good trader knows how to manage a portfolio. All too often, traders make the mistake of having a single entity such as the EURUSD or Gold or maybe even just a group like The Majors as part of their portfolio. There are varying reasons to this such as a lack of good software tools and a failure to understand that money flows between instruments and markets. A common reason I hear is that traders believe a currency has “a personality” and that by getting to know that currency and building an attachment to it is the way to extract consistent profit. This often-taught approach is a fallacy and a false economy.

Your attachment to any instrument should only be for as long as it is paying you and the most lucrative period is when an instrument is in trend - trends being defined using the monthly, weekly and daily time frames. The point to note is that trends move between currencies and between markets - FX, Stocks and Commodities - and a good trend can remain in play for months.

A large portfolio will do far better over the long term than a small portfolio and identifying trends in play is actually a very simple process. Once a trend is in play, the returns, for an initial small risk, are exponential as a trader can compound or scale in or add new positions. This has been the approach of many of the best traders and investors from before the Internet such as Jim Rogers, The Turtle Traders and Warren Buffet so really, there is no need to reinvent the wheel.

Focusing on FX for this article, managing a portfolio should start with a macro picture of the market with all The Majors, The Crosses and maybe a handful of exotics making up your list. This will total around 50 to 60 currencies. The next stage is to identify which group is in trend by using tools such as the 200sma and the 50sma on the weekly and daily time frame. Bollinger Bands are also another good tool as are the all important support and resistance levels.

The two groups that can be identified as currently offering the best trending opportunities are the GBP currencies and the JPY currencies. So the watchlist has gone from 50 to 60 to say around 15 currencies. All other currencies have been dismissed for now. (My last two articles have been on the GBPUSD and the GBPJPY and for good reason.)

The next stage is narrow the 15 to the best 2 or 3 by looking at the history of trend structure, how deep pullbacks in a trend are, how long consolidation periods are, is it a messy looking chart with a lot of wicks, where is price in relation to support and resistance such as round numbers and major pivots. This is best engaged using the monthly time frame.