Every profession has the ultimate rules to follow in order to be successful, and Forex trading is no different. In this field, there is a lot to consider if you’re going to be successful, but none of the lessons will be of help if you can’t remember these 7 golden rules of Forex trading.
1. Master your emotions
To me, this is the most important rule in Forex trading because I’ve seen traders who have understand the markets but just can’t act properly on the information. It is also first on this list because it’s going to be the most difficult rule to master. Even the most seasoned traders slip from time to time on this one and end up losing money.
What it means, in a nutshell, is to eliminate your emotions completely from the equation and trade as a robot would. Never get too excited about profits or too discouraged by losses but instead stick to the trading plan you have.
2. Always have a trading strategy
Before you even place your first order, make sure you know what you’re looking for. Your trading plan will include how you’re going to pick your trades and how you will exit those trades. Just remember that not every strategy will be perfect, none of them are, but you have to stick with it to know if it does or not. At the end of the week or trading day, you can then analyse your performance and tweak the strategy, but not while you’re trading.
3. Cut your losses early and let your wins run
The worst mistake you can make is to hope that the markets will turn in your favour. Many traders have lost their entire capital because they were hoping a loser would turn into a winner. Such traders forget that it is okay to be wrong once in a while, and the trick is to accept a loss sooner than later. To make up for any losses, ride your winning trades as much as you can and don’t rush to take the current profits. You might be surprised by how much the markets will move in your favour.
4. Keep risk low
Forex trading is a risky endeavour, which is why there will always be warnings about you losing your investment. It’s not the same as gambling, though, because you can still control the risk.
A good measure often quoted is never to risk more than 2% of your entire capital; maximum of 5%, I recommend. Having this buffer will keep you in the game even after suffering 5 consecutive losses or more. Then maintain a good risk-reward ratio to ensure your wins overshadow your losses in order to recover any losses.
5. Use both fundamental and technical analysis
Traders will always debate over which is the better market analysis tool, but it’s better to combine both of them. Even if you have specialized in one system, do not completely neglect the other because the markets certainly won’t. Therefore, learn how to utilize both strategies through al resources like this website about Forex brokers and any others. Each of the trading style will have its merits and demerits, and it’s better to take away the best from each of them.
6. Timing is key
If you enter a trade too late, then, well… you’re too late, and you probably won’t get as much profit as you would have otherwise. Timing is very important to a Forex trader, which is why Jesse Livermore attributed his success to sitting down at the table and waiting for the right time to trade. Be patient and never rush to make a trade. It’s much better to enter a trade a while later when you’re sure than to get in too early when there’s no certainty.
7. Respect the markets
Remember that the markets don’t follow any one trader’s hopes or wishes, so only rely on what you can see. If you see, say, the sterling pound, taking a beating, it doesn’t matter how much you believe in the currency, you too should start selling. The only thing that should matter to you is what is actually happening rather than your hopes or attitude toward an asset.