Education post 17/100 – How to trade 10 forex trading rules?
1. Research your broker, how do they stack up – It’s all very well to choose a broker because the interface is simple or you like the functionality, but do you know how they stack up to others? Have you really done your research? Make sure your broker is well regulated and licenced, well reputed, and that the spread they offer is consistently tight.
2. Only set aside capital that you can afford to lose – There is no fun in trading, if you are risking your livelihood in doing so. This will only encourage emotional trading and turn you into an emotional wreck. Only invest that which you can afford to comfortably and this will make it easier to relax into it and trust your strategy.
3. Don't let your emotions get the better of you – This is absolutely critical to successful trading. If you wake up, and your mind is not on its game, you are cloudy or your mind is full of other things, take the day off trading. It is no wise move to enter the market if you can’t concentrate, or if you carry anger at a loss. Trading in these scenarios will not do your strategy justice, and the market will eat you up and spit you out a poorer person. Learn your mind, your emotional responses to trading and how to master these things. If you face a situation where you can’t do this for whatever reason, walk away until you can.
4. Don’t be scared to take a break – If you stare at the charts and price action continuously, not only will you damage your eyes, but you will go slightly mad. Don’t be afraid to take regular breaks. Just make sure that when you do, you have reasonable stop losses in place, or no open trades at that time. This is more critical when scalping or intra-day trading rather than longer position trades where you don’t need to be quite as on top of the short term charts. Yes you might miss the occasional opportunity, but this is inevitable in a market that doesn’t sleep.
5. Plan Trades carefully – patience and analysis are your friends. If trading a trend, it is far better to place pending orders at a good price rather than just jumping into the market. Wait for the price to come back rather than entering at peaks just because you're impatient.
6. Reasonable Risk/Reward ratio at least 1:5 – Every time you enter the market you take a risk. So you really want to make sure you optimise a risk/reward ratio that allows you to make each trade worth the risk, without being too greedy. Spread is important in this, as the greater the spread, the greater the reward you will need to achieve to turn a profit, so the tighter the spread the better.
7. Risk no more than 5% of your trading capital – If you risk too much, you will hav e very short career in trading. Success takes time to achieve, and profit time to accumulate. Maintain consistency between trades and that way if your strategy is winning more than it loses, over the long term you will be profitable. If you are inconsistent with your risk, then you leave yourself over to uneven results from wins and losses. Potentially this could mean that regardless of winning on more trades than you lose, that the value of the losses outweighs the gains so be disciplined and consistent.
8. Don't place Stop Loss too narrow – Particularly when your trade is going the right way. A trade needs room to breathe, the more volatile the selected market, the more room it needs to breathe. If you pay attention to the trade, you can always move the stop loss up as the trade continues in the right direction, but always be careful to place it too high, or this will risk stopping the trade prematurely, creating a scenario where you could potentially miss out on the full potential of a trade.
9. Use Trailing Stops when applicable – These are particularly useful when not actively monitoring the trade. They can safeguard an acceptable level of profit if the market turns, while leaving room for some of your capital to generate further profit if it continues to move in the desired direction. If you are a dab hand at automatic trading or programming Expert Advisors, you can find or generate an EA that can do this automatically as per a set of rules you stipulate. This depends of course on your trading platform.
10. Have some patience, but don’t confuse this with greed – Patience is a virtue and greed is a sin. It is vital to learn patience, to control impulsiveness and trade by strategy and system rather than emotive. However, when it comes to taking a profit, be careful not to confuse patience with greed. Yes, let a profit run but don’t let it hypnotise you, you want to stop it before it turns especially if it turns sharp and quick.
2. Only set aside capital that you can afford to lose – There is no fun in trading, if you are risking your livelihood in doing so. This will only encourage emotional trading and turn you into an emotional wreck. Only invest that which you can afford to comfortably and this will make it easier to relax into it and trust your strategy.
3. Don't let your emotions get the better of you – This is absolutely critical to successful trading. If you wake up, and your mind is not on its game, you are cloudy or your mind is full of other things, take the day off trading. It is no wise move to enter the market if you can’t concentrate, or if you carry anger at a loss. Trading in these scenarios will not do your strategy justice, and the market will eat you up and spit you out a poorer person. Learn your mind, your emotional responses to trading and how to master these things. If you face a situation where you can’t do this for whatever reason, walk away until you can.
4. Don’t be scared to take a break – If you stare at the charts and price action continuously, not only will you damage your eyes, but you will go slightly mad. Don’t be afraid to take regular breaks. Just make sure that when you do, you have reasonable stop losses in place, or no open trades at that time. This is more critical when scalping or intra-day trading rather than longer position trades where you don’t need to be quite as on top of the short term charts. Yes you might miss the occasional opportunity, but this is inevitable in a market that doesn’t sleep.
5. Plan Trades carefully – patience and analysis are your friends. If trading a trend, it is far better to place pending orders at a good price rather than just jumping into the market. Wait for the price to come back rather than entering at peaks just because you're impatient.
6. Reasonable Risk/Reward ratio at least 1:5 – Every time you enter the market you take a risk. So you really want to make sure you optimise a risk/reward ratio that allows you to make each trade worth the risk, without being too greedy. Spread is important in this, as the greater the spread, the greater the reward you will need to achieve to turn a profit, so the tighter the spread the better.
7. Risk no more than 5% of your trading capital – If you risk too much, you will hav e very short career in trading. Success takes time to achieve, and profit time to accumulate. Maintain consistency between trades and that way if your strategy is winning more than it loses, over the long term you will be profitable. If you are inconsistent with your risk, then you leave yourself over to uneven results from wins and losses. Potentially this could mean that regardless of winning on more trades than you lose, that the value of the losses outweighs the gains so be disciplined and consistent.
8. Don't place Stop Loss too narrow – Particularly when your trade is going the right way. A trade needs room to breathe, the more volatile the selected market, the more room it needs to breathe. If you pay attention to the trade, you can always move the stop loss up as the trade continues in the right direction, but always be careful to place it too high, or this will risk stopping the trade prematurely, creating a scenario where you could potentially miss out on the full potential of a trade.
9. Use Trailing Stops when applicable – These are particularly useful when not actively monitoring the trade. They can safeguard an acceptable level of profit if the market turns, while leaving room for some of your capital to generate further profit if it continues to move in the desired direction. If you are a dab hand at automatic trading or programming Expert Advisors, you can find or generate an EA that can do this automatically as per a set of rules you stipulate. This depends of course on your trading platform.
10. Have some patience, but don’t confuse this with greed – Patience is a virtue and greed is a sin. It is vital to learn patience, to control impulsiveness and trade by strategy and system rather than emotive. However, when it comes to taking a profit, be careful not to confuse patience with greed. Yes, let a profit run but don’t let it hypnotise you, you want to stop it before it turns especially if it turns sharp and quick.