Currency technical analysis can help you spot the big trends that yield the big profits. However, how do you stay with the trend, and make sure that you capture maximum profits - and not bank them early?
It’s a fact that traders who use technical analysis in the currency markets, snatch their profits too quickly, and miss the major profits.
Here we show you a strategy to stay with the trend, and catch the maximum amount of profit.
The Problem with Currency Technical Analysis
The problem with trend following is, it’s down right hard! Every correction in the market costs you money, and you have to decide whether to take your profit, or wait and see if the trend goes on and makes more money.
Most traders can’t hold on - they prefer to bank the small profit, and they miss the major moves.
Let’s face it, it’s hard to stick with long trends - and this causes most traders a psychological dilemma - one that they can’t handle.
Here we outline a strategy that you can incorporate in your technical analysis, to make riding profits easier - and give you peace of mind.
Use Options to Lock in Profits
Let’s say you’re long in the euro currency - and making $5,000 on a $10,000 trading account – that’s a nice profit - why not take it? Well, if the trend is in your favour - as indicated by your currency trading analysis, it could run on to make $15,000, $20,000, or maybe even more - so you should stay with it!
The solution is option hedging - options can help you manage your open profits, and protect you.
In the above example, you could buy a put option - so that you can establish a price floor beneath you. The great thing about this option strategy is that your upside remains unlimited - but you’ve completely capped your downside risk.
That’s what we call peace of mind - getting an option in, as insurance against unlimited losses. By doing this, you’ll be able to stay with the trend for longer, as indicated by your technical analysis chart.
So, What’s the Catch?
The negative aspect of this strategy is that options suffer from time decay - and you’ll lose all, or part of your premium - regardless of what the market does.
You’re basically buying an insurance premium - and this is the cost - you don’t get anything for nothing in this world!
You therefore need to make sure that you’ve already got enough profit to protect, to make this strategy worthwhile.
You also need to look at your technical analysis chart - and see a strong trend to the upside – i.e. the odds are in your favour, that there are more profits to come.
As a rule of thumb, avoid protecting profits of under $3,000 with this strategy.
When utilising this strategy, only use options that have between 45 – 60 days to expiry. Options with less than 30 days will not function optimally - due to their rapid time decay.
The Logic Makes Sense
If you’ve a good open profit, and your technical analysis shows more profits to come, then its worth protecting in this way - as the odds favour you making money in excess of the money you lose on the insurance policy.
Most traders simply can’t stay with long-term trends - and always bank early.
Currency trading technical analysis shows us that the big trends last a long time -sometimes months or even years - and it’s a fact that most traders bank early.
If you’re in a strong trend, use the above tool along with your currency trading analysis - and get ready to ride those big winning trades for all they’re worth.
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Article Source: http://EzineArticles.com/?expert=Stephen_Todd
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