Forex Trading Tips and Rules

This lesson sets out some simple currency trading tips and rules .

We have developed these rules from our own experience, and that of successful currency traders. These rules are in summary form, and are elaborated on in other later lessons.

Don’t Overtrade

Overtrading is when you trade more positions than are justified by the amount of margin in your account. For example, if you have $10,000 in your account, this does not mean that you should trade 10 positions. In fact, you should probably trade 1 or 2 positions.

If you overtrade, it significantly reduces the probability that you will be a successful trader. This is because it reduces your ability to absorb losses and continue trading. Losses are a fact of life for all traders, so plan accordingly. You should trade about 1/5 of the maximum number of positions that you can open.

If you don’t have the capital to cover a full sized contract, consider the mini-contracts offered by some FX brokers. These contracts are usually for $10,000, and you can trade a position with $1,000 in margin.

Never Add to a Losing Position

If you have a losing position, you should have an exit plan which includes a stop loss. Don’t make your position worse by adding to a losing position. This simply magnifies your losses, should the adverse movement continue. If you have made a mistake, then close out the position and put it behind you.

Don’t trade against the trend

You need to understand trends before trading. There are short, medium and long term trends. When you place a trade, you should aim to take advantage of medium to long term trends. This means that you will trade in the direction of the trend that you have identified.

It is a mistake to try to pick market tops or bottoms (reversal points). Wait for the market to clearly indicate a trend rather than trying to pick the change in trend, and ending up trading against the prevailing market trend. Trading against a trend is a sure way to lose money.

Intra Day Currency Trading

Be very careful with FX day trading, especially when you start trading. The smaller your profit targets, the higher percentage you need to win to break even, due to the broker spreads. If you only aim for 10 pips, you will need to win a lot more trades just to break even than if you aim for 200 pips. FX day trading is usually a lot more time consuming and potentially stressful too!

Develop your own trading system

Every successful trader uses a system. A system needs to tell you when to enter the market, how much risk you need to take in a position (which will determine your stop loss) and when to exit (it is unlikely that your system will be able to tell you what the exit point should be at the time when you enter a position).

A good trading system will result in average profits greater than average losses, with a manageable level of risk (measured by drawdown, or the maximum adverse impact on your account).

You need to develop your own trading system so that you can be confident of its effectiveness, and not be tempted to second guess it. We recommend against buying someone else’s system. We have seen a lot of systems that have been tested on past data, which was also used to develop the system. If a system is really good, it is unlikely that someone will sell it at a low price.

You can use the paper trading systems offered by some brokers to fine tune your system, and develop your own trading skills without risking your own money.

Write down your reasons for entering a trade

We recommend that you write down the reasons that you entered each trade in a trading journal. This will help you clarify the reasons in your mind, leading to more objective trading. In addition, you can look back over your journal, and learn from your experience.

Don’t trade fast markets

A fast market is where some important news has been released, and the market moves very quickly in response. This is not a good time to trade because you can’t be sure of prices really are, as reporting will tend to lag. This means that you could get some very unattractive order fills. Also, the market may over-react, and may reverse just as quickly once the news is assessed in more detail.

If you take a longer term perspective, you won’t need to be unduly concerned with very short term fluctuations in the market, so there will be no need to attempt to trade on releases of market information

Always use a stop loss

A stop loss defines the amount of risk that you are prepared to take on a position. You can place a stop loss with your broker, and your position will be automatically closed out once the market touches the stop loss.

You should always use a stop loss to prevent huge unforeseen market movements from wiping out your account. Your trading system should help you quantify the maximum adverse movement you can incur before being wrong. You should place your stop loss when you open your position.

Let profits run

It is always tempting to take a quick profit, but successful FX traders cut losses short, and let profits run. Your system should give you a clear signal when to take a profit. If you take small profits, it is unlikely that you will make enough to cover the inevitable losses.

Forex Trading for Maximum Profit

Managing risk is all about understanding and limiting the potential impact of sudden market movements. One way of limiting risk is using stop losses, which is discussed above.

As well as not overtrading, you also need to be aware of the total risk in your trading portfolio. Some currencies tend to move in the same direction (that is, they are highly correlated). This means that when you have several positions in different currencies, they could be acting like a single larger position. This is not necessarily bad, but you need to be aware that this increases your risk. This is very important for getting maximum profit out of your trading system.
There may be other important forex trading tips you can think off, it is very important that you learn the required discipline to consistently apply these currency trading tips if you want to become a successful currency trader.

Forex Trading Contest

Some brokers now offer forex trading contests and award a prize to the trade who is able to generate the highest return within a month. The winner usually uses a huge amount of leverage that potentially runs the risk of blowing their account if the market moves against them. This is just gambling, avoid these games at all costs!

Best Forex Trading Signal

Avoid anyone who claims to have the best forex trading signals. Most signal services are run by losing traders, they are unable to make money trading forex so they decide to sell signals. Does this sound appealing? thought not. It is always best to generate your own signals. This forex trading website has tutorials to show you how to do that so you don’t need to use other peoples bad signals.

Demo Trading Account

Have a good forex trading strategy that you have traded on a currency demo account for a considerable amount of time before trading it on a live account.

Professional Forex Trading

Do your best to trade like a pro and do your best not to give into temptation by trading when the conditions of your trading system are not met. This may be extremely hard at first, but keep trying, it will get easier in time. Discipline is what it is all about.