Golden Rules of Forex trading that cannot be broken
Are you new to Forex? Check out the golden rules of FX trading here before getting started.
- 4 Golden Rules of Forex trading that cannot be broken
- Money management: The Basics, which cannot be broken
- Basic principles of Forex trading
- Symptoms of psychological dependence on trade
- Killer tips for Ever Successful Forex Trading
- Common Mistakes To Avoid in Day Trading Forex
- How to choose your Forex broker wisely?
4 Golden Rules of Forex trading that cannot be broken
Despite apparent crucial importance of the fact that the trader must know when to enter the market, many professional traders consider criteria for capital and risk management of personal trade paramount.
Only they are paramount, and nothing else.
Markets are constantly changing and different periods and phases come and go.
Accordingly, systems and patterns of trade, which worked yesterday, today can fail.
That’s why rules of capital management are the only reliable island in the storming oceans of markets.
And professionals will never back down from them, because it’s the only thing that will save you in case of complete lack of understanding of the changes taking place in the markets.
Models and methods of management of risk in trading and management of commercial capital perform the most important basic function for a trader – saving capital.
See the list of online Forex brokers
Money management: The Basics, which cannot be broken
Here, everything can be represented in a unified and universal form – cut your costs and increase profits!
Almost all, without exception, novice traders are beginning to think about their trade route, only in terms of profit.
And the emotional question of how much I earn immediately gives way to the question, how much can I lose.
Although the second question is more important.
If potential losses of any operations make up half of your capital, then a couple of unsuccessful operations in a row will instantly kick you out of the market and possibly for a long time.
Therefore, it is important to understand that for stable and long-term results, avoiding losses is more important than getting big profits on the basis of two main mathematical principles:
- The greater your account or investment portfolio becomes, the more your capital depends on any particular reduction of percentage ratio.
- Much higher percentage of profits will be needed to recover any losses percentagewise.
Basic principles of Forex trading
It sounds simple and uninteresting for a rooky trader dreaming of a new car or a boat.
But usually, the time comes and people start thinking about it, when a series of losses is sobering you and makes you think.
Indeed, to make up for 50 – per cent loss, 100% of profit is required, and 33% of losses can be saved by 49 – per cent profit.
Aggressive operating plan, which assumes effective return, but is not based on the management of your capital or control of risk is always doomed to failure.
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Therefore, development and debugging of personal trading system should be approached with caution. Without fear and greed.
With understanding of a few basic principles.
To reduce the risk the trader, in principle, can choose from the following options:
- Close (or do not open) position (completely eliminating the risk);
- Sell a portion of the position or buy a smaller share at the initial purchase;
- Increase the “stop-order” until risk is reduced to an acceptable level;
- Wait until the market comes close to a reasonable stop and if the grounds for the operation still exist, execute the operation at this point (valid until cancellation order to limit purchase, similar in meaning to “stop order”, is able to automatically solve this problem, but it should be carefully controlled so that the signal for purchase remained in force).
Even if each entry to the market is ideally calculated in time, a series of losses can reduce to zero any account.
The best option of risk management approach can be a system that includes the following components:
1. You need to have a plan in case things do not go the way you planned
Lack of good risk management plan is the main reason why new traders fail.
Then come disappointment, accusation of the market and leaving financial markets.
We believe that the plan should be not just in mind, but also in writing.
For example, there are specialized tools that allow you maintaining, planning and keeping of statistics of accomplished trades.
Ideally, you just have to take each planned transaction as a working hypothesis.
And if something goes against your hypothesis, immediately get out of the deal.
2. You must follow the principles of diversification on financial instruments
In 1990, Harry Markowitz won the Nobel Prize in economics for having demonstrated how possession of a portfolio of financial instruments with high standard deviation, but at that with negative correlation (when some instruments rise, others fall), can lead to greater profitability compared to lower total standard deviation.
His work has denied the common knowledge that the price of higher profits is always an increased risk, and showed that apparently risky financial instrument can alone paradoxically, reduce the risk of the portfolio.
In the same category of financial instruments holding of several positions is less risky than holding a dollar equivalent of one.
Traders can reduce the risk by dividing their capital between unrelated markets.
The likelihood that the transactions at the same time will fail in all markets is less than the probability of failure in one market.
3. You must follow the principle of diversification of trading systems
Markets are constantly in motion and market phases replace one another.
Naturally, some systems work better than others in some phases of markets.
Diversification of 2-3 systems can reduce the volatility and the “gaps” in your portfolio to a less profitable but more stable growth.
4. You have to observe loss limits
For example, you can set for yourself that under no circumstances you can risk more than 2% on any given transaction and more than 10% in respect of the investment portfolio as a whole.
This does not mean that you cannot use your entire portfolio for operations.
You just set the limit or insure your capabilities in such a way that your maximum loss on any transaction could not exceed 2% of your portfolio.
Such a commitment would mean that if in any month, your losses will be more than 10% of the total amount of your capital, you should stop the operations and review your approach more carefully, and give yourself time to put your emotions in order.
Symptoms of psychological dependence on trade
Often, for some traders entire process of trading and analysis is subject to several other algorithms of behaviour which are not fundamentally different from gambling.
We offer you to get acquainted with some obvious signs of such behaviour and to correct yourself, if necessary:
- You have received one or more losing trades and then rush to the market with a view to urgently rehabilitate and fight off losses;
- You worry before entering the market, and then “hypnotize” the graph and worry even more;
- You get a loss, and relate it to the “irregularities” of the market;
- You actively monitor forums and other places of communication of traders to indirectly obtain confirmation of your rightness in relation to the prospects of a particular tool;
- Before going to bed you run to the monitor. And the first thing you do after sleep – also run to it;
- You check your account balance on open positions in your terminal every 5-10 minutes;
- You begin to criticize other traders and systems
How is it treated? Dramatically – by loss of deposit. Here are correct and softer ways to handle it:
- Take breaks. Take a break from the market for a few days, weeks or months, and allow your mind to relax. During this time, try to avoid exposure to market information;
- Keep a diary. Most people with an addiction plunge into it. Writing down your trades, thoughts and ideas, you can clearly see what you do and when to stop and check yourself;
- Assert yourself in research;
- Create a strategy, shorten it as much as possible and stick to it. The simpler your strategy is, the easier it is to follow it.
Killer tips for Ever Successful Forex Trading
Something that every trader strives to seek in forex trading platform is tips and techniques.
Besides learning the strategy, analysis and trading procedures, be it new or experienced traders, everyone often seeks some tips from the experts for a successful trading.
This is because, the market is not always the same and it keeps changing.
To help you with some killer tips for successful forex trading, here follows:
- Grasp the opportunity you get to trade without missing. This will give you an exposure to learn more
- Don’t become too confident about your performance, this is because no one can be 100% accurate always in predicting the market condition
- Avoid trading when you have, the chances to lose, rather never misses the opportunity that has winning potential
- Try to measure your success by the profit you made for the day and not on the entire trading. You can also measure your success on the basis of two or three day scenarios
- Day trading can help you reduce the risks involved in the market
- Try to spend some valuable time to understand the market condition and its daily performance
- Do not rely on someone’s opinion, as their style of marketing and expectations differ from yours
- Do not have great expectations while trading, as the market conditions are most of the times unpredictable. Therefore, keep your fingers crossed while trading, however, your core objective must be in making a profit, while reducing the chances of risks and loss
Common Mistakes To Avoid in Day Trading Forex
Trading Forex is one of the popular ways of earning by well-experienced and knowledgeable people all around the world.
Some will engage in long term trading as a hobby while some will do day trading forex as their full time business.
People, who do day trading as their full time career, study a lot, do strenuous research, attend some courses, be in touch with other traders and professionals in this field, analyze the reports and fine tune their mind in the proper direction.
However cautious they are they make certain mistakes, lose money in the beginning and only after leaning from the mistakes, they start making profits.
Common Mistakes by Day Traders in Forex Trading Forex:
- Averaging Down
Most of the beginners, tend to go averaging down, that is holding the losing position in terms of both money and time, for a longer time than they can manage. This is mainly due to the short span of time involved in day trading forex currency.
- Pre-Positioning for News
Traders always are following market news and events but cannot predict on how the trading directions will get affected on a particular news. However, based on the trend they often take positions before hearing the exact news and damage their business.
- Trading Right After News
Reacting as soon as the news hits the market and the volatility is very high is a common mistake done without thinking of the hair-pin turns.
- Risking More Than 1% of Capital
Beginners in money trading forex often do this type of mistake.
- Unrealistic Expectations
Having a definite plan and following it will eliminate this mistake in fx trading forex.
How to choose your Forex broker wisely?
Choose wisely, and pave the way to Forex Trading Success.
Are you a Forex trader? If you are, then you understand the importance of associating with a broker that best suits your needs.
In your search for a genuine forex broker, it is crucial that you carefully scrutinize all your options by understanding some important criteria like.
Is the broker registered as required by relevant laws and institutions? What are the terms and conditions that you will be bound by if you trade with them? Make sure you know before you enter into a binding contract that makes you liable.
- Market reputation
A brokerage with a good reputation in the market is more likely to help you achieve success in Forex trading. Especially if you are a beginner, try to associate with a broker that is established as reliable.
- Customer service
A broker that cares about its clients usually has an excellent customer service policy and offers support wherever and whenever needed. Look for reviews from existing clients of a brokerage before you make your decision.
Be sure that you understand the broker’s policies on commissions and spreads so that you know exactly how much profit or earning you are entitled to.
- Account types
See what types of accounts you can open with a broker, like standard accounts and ECN accounts. Some brokers offer beginners the opportunity to practice trading in a market environment.
Apart from these, an honest Forex broker is definitely safe to trade with.