Also known as passive management, passive investing is a means to limit your exposure to the sometimes sudden changes associated with a discrete position. Lower transaction fees and more stable profit margins are two additional goals associated with this approach. Although passive investing is normally associated with following a market-weighted index, it is still possible in reference to Forex trading. Let us look at some general concepts to appreciate as well as why this strategy can prove to be worthwhile from a longitudinal perspective.
The first tip is to have the correct psychological mindset. By its very nature, passive trading is a much less proactive approach when compared to other strategies such as day trading. The passive trader is more interested in long-term goals as opposed to short-term positions. This can also help to limit the amount of emotion involved with a given trade; essential for making objective choices.
It would be a mistake to assume that passive Forex investing is a “hands-off” methodology. On the contrary, it is just as important to follow interest rates, economic data and other major indicators. However, the percentages placed within any given position can be somewhat less than those associated with short-term day trades. The theory is that once a profit goal is reached, these funds can then be withdrawn and used as a means of sustainable wealth.
3. Prudence Through Automation
Many passive traders take advantage of the tools and instruments offered at CMC Markets. Stop-loss, OCO and limit orders are three examples. Automated trading methods offer some very unique benefits. First, unpredictable losses can be curtailed. This is obviously important for those who are on a limited budget. However, this approach will not dampen any profits to be realised. Passive and prudence should always be used within the same sentence in this fashion.
4. Long-Term Market Trends
Many passive Forex traders tend to minimize the impacts of any knee-jerk reactions which often occur within the currency sector. Instead, they focus on the big picture. This is often simply referred to as “big picture” trading. Spotting long-term trends and factoring in potential impactors (a recent example could be the potential Brexit) are both methods that are employed here.
5. New Versus Existing Capital
Staying true to the mantra of mitigating risks, passive traders will always strive to reinvest profits from previous positions as opposed to depositing additional capital. To put this another way, such a strategy is seen as “leapfrogging” from one position to another. Should losses occur, these will not ablate funds that cannot afford to be spent.
These are five excellent tips for those who may be looking to adopt a more passive trading approach. Like any strategy, passive trading takes a certain amount of skill and success will not occur overnight. Be sure to use the informative tools within CMC Markets to appreciate the further intricacies of such a methodology.