A portfolio is a collection of assets owned by a trader or trading firm. Any investor in the FX market has to have a solid forex investing portfolio. Traders who are new to the FX market should create portfolios to manage their assets. Setting up an investment portfolio allows the investor to keep track of the trading methods he or she is using to maximize the likelihood of profiting in the market. A portfolio, which is often maintained by the individual who owns it, simply means diversifying risks by investing in various assets.
Step 1: Choose the forex security you want to trade
You have to decide which security you want to trade. You can choose from the following:
Assets: Will you deal with merely exchanging currency notes, or will it entail trading forex futures, forex options, or more complicated forex exotic derivatives (such as barrier options)?
Currency pair(s): will you trade in accordance with the established approach (like AUDUSD, USDCAD, etc.)
Three forex currency groups: Include major, minor, and exotic. You should know the chosen forex pair where it belongs.
Step 2: Choosing the timeframe
The second thing you must consider is what type of trader you are. Are you a day trader or swing trader? Day trading aims for a higher number of pips, and positions can be held for several hours. Scalping in the forex market is buying and selling currency pairs with a pips objective and holding positions for little more than a few minutes, if not seconds. Day trading aims for a higher number of pips, and positions can be held for several hours. These trading techniques combine heavy leverage with very short-term trading tactics to generate small but steady gains.
How much time is dedicated to looking at charts? Is it on a daily, weekly, monthly, or even annual basis? How long do you intend to stay in your current positions? This will assist you in deciding the time frame to trade on. Even while you will still look at numerous time frames when looking for a trade signal, this will be the primary time period you will employ.
Step 3: Decide on the analysis technique
If you intend to hold positions for months, the fundamental approach is appealing. However, technical analysis helps to pinpoint the exact entry/exit and limit the risk.
Technical traders
They employ technical analysis to analyze an asset’s price movements and estimate future price action based on historical prices. To trade, they use support and resistance, trendlines, mathematical and technical indicators, market theory, Japanese candlesticks, and price patterns.
Fundamental traders
They use fundamental criteria to assess a financial asset’s underlying worth, determine whether it is cheap or overpriced and if it should be purchased or sold. A fundamental Forex trader will mostly employ news trading or currency carry techniques, which are based on interest rate fluctuations, which have the greatest influence on exchange rate movement.
Step 4: Find indicators to use on the chart
To identify a trend
You should employ indicators that can help us identify patterns as early as possible, as it is one of our aims. Moving Averages (MA) are one of the most often used indicators by traders to identify trends. They employ two MAs (one slow and one fast, for example, the 20-day MA and the 50-day MA) and wait for the fast one to pass over or under the slow one. A MA crossover mechanism is built on this foundation. MA crossovers, in their most basic form, are the quickest way to spot new trends. It’s also the most straightforward technique to recognize a new trend. There are other indicators used too.
Confirm a trend
Our second purpose is to be able to prevent whipsaws, which means we don’t want to be trapped in a “false” trend. This is accomplished by ensuring that when we notice a signal for a new trend, we can validate it with the help of additional indicators. Many useful technical indicators, such as MACD, Stochastic, and RSI, may be used to confirm trends.
Step 5: Find enter/exit strategies
Traders often use technical analysis to schedule their entry and exit from the market while also keeping an eye on the economic calendar for news that might alter market volatility and spark possible trading opportunities. After you’ve decided the type of market analysis to employ with your trading strategy, you’ll need to identify and comprehend market stages. Various techniques and indicators are more effective in different market scenarios.
Step 6: Define your level of risk
Knowing how much money you’re willing to lose on each trading position is key to determining your risk. It’s not pleasant to think about losing, but it’s vital if you want to be a successful trader. Each trader’s connection to risk, as well as how well a trader understands himself, determines the optimal degree of risk. Some of the traders’ rules include setting your risk/reward ratio to a minimum of 1:2 and preventing over-leveraging.
Step 7: Back and forward-test the portfolio
Backtesting
This is the process of putting your trading method to the test on a collection of historical data; if the results are lucrative, your trading strategy has a positive expectation, and you would have profited from it at the time. You can adjust some of your parameters and retest to achieve the best results possible.
However, it’s vital not to fiddle with your variables too much since you’ll end up with a method that’s quite specialized to the market circumstances inherent in the historical data you utilized. As a result, your approach is unlikely to adjust to future price fluctuations. Curve fitting is another name for this phenomenon.
Forward testing
It is a method of putting your trading system through its paces in a simulated market setting without risking real money. It works by recording all of your buying and selling trading decisions according to your trading method and calculating how much money you would have made if you had traded for real.
You can open a “demo” account that simulates real-time market and trading circumstances with virtual cash so you can see if your technique is lucrative.
Conclusion
Most traders create a forex portfolio to eliminate emotional attachments and mental blockages that are recognized to be the leading causes of trade failures and losses. The portfolio is built by a series of processes, which include: choosing the FX asset you want to trade, the time frame, deciding on the analysis technique, identifying indicators you want to employ, finding enter/exit strategies, defining your risk, and back and forward testing the portfolio.
