Trading Guides: Forex Trading Rules

The following rules can help you better understand the markets and improve your trading skills.

1. Start Slow

Don’t expect significant profits from day one.

The most common problem novice traders face is that they lose money when they start trading and end up quitting early. It’s often the case that traders will double their capital within their first week of trading only to lose everything soon after, because of becoming over-confident in their trading.

Begin with small trades and build-up your profits slowly but steadily. There are very few traders who succeed in the early stages of their career. It takes a lot of time, effort, determination and patience.

2. Have a Trading Plan

Having a trading plan is one the golden rules of Forex trading. This holds true for any trading related activity. A person with a carefully calculated plan is more likely to succeed than someone without a plan.

Your trading plan should consist of the following basics:

  • An outlined and well-thought-out trading strategy

  • Both exit and entry points delineated

  • Pre-set stop-losses and take-profits

It should be noted that the plan can be modified, as change that could demand improvement or amendment can happen anytime due to the volatile nature of the market. Modifying your plan should only happen when you have no open positions. Do not modify your plan to keep a losing position open for a longer period of time, hoping it will turn into a winning one, as this often leads to undesired results such as the loss of your entire invested capital.

3. Set a Stop-Loss to minimize your losses

You should base your trading plan on this technical advice:  It is always wise to set a stop-loss in all your trades.

A stop-loss will set a limit at which a losing position will be stopped. By doing so, you are given the power to decide just how many pips you are willing to lose.

As previously mentioned, many novice traders lose their initially invested capital and are thus unable to continue trading. Setting a stop-loss could minimize losses and save some capital to trade on a different day.Another common error with novice traders is that they forget about stop-loss placements because they feel that constantly monitoring price changes will suffice. It does not. While you can spend most of your time in front of the chart, sometimes being away from the keyboard for a few minutes can cost you hundreds of pips. That’s why you should only open trades with a stop-loss attached to them. This is a general rule that every trader should adhere to and it’s one of the top Forex trading rules.

4. Always keep your emotions in check

Forex trading can be both exciting and stressful at the same time, depending on your profits or losses.

As a result, controlling your emotions is one of the most essential Forex rules to follow.

There is no room for mistakes or rash decisions in the Forex market; once you’ve lost money there is no undoing it.

If you feel that you are unable to focus solely on trading during a session, or that you are not in a good mood, it’s better to take a break from trading and return to it when you are feeling better. Trading when you are too excited can be just as detrimental.

It is easy to make irrational and impulsive decisions and this applies even to hardened forex traders with years of experience. Be aware of your emotional state at all times. In most cases, trading requires manual activity from your part, which needs to be done with the highest level of diligence, structure and attention. Trading for long periods of time can be very taxing to your mind and body, so remember to take frequent breaks to allow yourself sometime to rest and recover.

5. Analyse and Learn

Your trading history is one of the best sources for gaining trading knowledge. Get the most out of this, by exploring what you have done in the past and by analysing how the market behaved at the time. Try to spot patterns and re-evaluate your past decisions. Establish your review sessions on a daily or weekly basis (depending on the frequency of your trading) and assess how to constantly improve your trading strategy.

Don’t focus only on losing trades; sometimes analysing profitable trades can prove to be even more beneficial.

Even if you have been making losing trades most of the time, see it as an opportunity to learn from your mistakes and gain valuable knowledge through your experience in order to properly adjust your strategies. Without analysing your own trading you are prone to repeat the same mistakes over and over without any real progress.

6. Adapt quickly

The behaviour of the markets is constantly changing from one state to another. A ‘calm’ market can rapidly change to volatile and vice versa. So, it is vital for you to be able to quickly modify and adapt your trading strategy accordingly.

The Forex market is of an enormous scope. Likewise, so is the scope of the knowledge you can gain about it. There is no trading strategy that works for all trades at all times. If your current trading strategy works, it doesn’t mean that it will work over a long period of time or for any and all trades.

Successful Forex trading requires following the rules of currency trading such as proper implementation, in-depth analysis and lots of learning.

Learning and adapting from trades, should become a habit. If you stop analysing and learning, then your trading growth is stumped.

8. Don’t waste time

While Forex trading can be both educational and exciting, the main goal is to make money.

For this reason, you should only consider this investment if you feel like trading Forex is much better a time spent than time spent doing any other job.

Without proper profit, you will eventually get tired and are more likely to make moves with a higher risk factor, to satisfy your income needs or while attempting to ‘regain’ your losses. Therefore, opportunity costs should always be considered.

Nevertheless, you don’t have to risk more to earn more in Forex; you just have to increase the volumes of your trading and proportionally increase the size of your trading capital at the same time.