Every trader from time to time gets a little lost or ahead of themselves. So often you will hear or read traders commenting that they “wish they’d done this” or “should of just done that”. The more experience you attain, the more automatic the core processes and core thinking becomes, but at the start it is easy to lose your way once in a while. With that in mind, I have compiled a list detailing a set of golden rules that I think you should stick to when trading. If you follow these rules you will develop control over your losses, so the only time you are on a losing trade, is when its already accounted for in your strategy. Without further adieu, let’s begin.
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.
11. Test Signals Vigorously – If you are experimenting with different signals, you need to test them extensively before applying them to your live trading. There are an abundance of external signals and ideas and it’s great to have so much for free out there. But just because it’s there it doesn’t mean that it works or that it will work for you. Test everything in a demo environment first, make it prove itself before committing your money to its word.
12. Remember to listen to your gut – Sometimes even when everything looks right, your gut says no. Remember and listen to this, sometimes we subconsciously pick up on things that don’t quite make it to the front of our minds. The worst that can happen here is that you miss out on a trade that had potential to be successful. But at least your trading capital is safe and ready for a more trusted trade.
13. Be cautious with pulling the plug – Some say, that if you need to let a trade go that you should try to wait for it to get as close to 0 as possible. To do this is very risky. If a trade has turned against and you want out, as a rule just cut the loss. Delay can push your loss further down and this can eat into your capital considerably. If you are waiting for a return to 0, you could be waiting all day, all week, all the while eating away at your capital. It is a waste of time and money. Cut the loss, accept it and make more efficient use of your time and money by going back to your charts and fundamentals, researching or finding a much more positive trade elsewhere in the market.
14. When a market turns, accept that it has turned – What I mean by this, is that when price slows, and starts to get close to your stop loss, don’t move your loss down in the hope that giving it more room will allow it to bounce back. You placed your stop for a reason, and that was because it was a level of profit or loss that you were willing and ready to accept. If it is going to stop out, then let it and you have at least traded to an acceptable result. If you move it down and the market continues down the reversal, then you stand to lose more or win less than you were comfortable accepting.
15. Trade within your comfort zone - It’s true that to make quick, large profits in forex, you need to be trading either large amounts of capital, or with a great amount of risk. For most this combination is not sustainable and often ends in disaster. You need to understand at the start that long term focus and consistency is the path to sustainability. If you are putting on trades that leave your heart racing and breathing shallow, you are trading outside your comfort zone of what you find acceptable amounts of capital to risk or potentially lose. This will only make your emotions harder to manage and this will impact your trading.
16. When you can't afford the loss, don't take the trade – As above, If you are risking more than you can afford then you are well outside your comfort zone. Chances are that by taking on such a trade you are doing so impulsively and emotionally rather than as part of a well-structured strategy. Stop and think about it.
17. Try different Strategies – It is important not to become too reliant on one strategy or one idea. The market evolves, constantly. It is in a constant liquid state, each minute of each day is unique in this regards. As such, you need to be constantly learning, adapting and evolving to market changes. While trading real money on a live account, it is a good idea to be testing new ideas and strategies in demo at the same time, with a view to applying positive changes to your live trading strategy.
18. Don’t keep all your eggs in one basket – At first it is a good idea to have one live account, as many demos as you want but one live account. Over time however, if you become profitable, it is a good idea to set up different accounts, possibly utilising different brokers, as not to have all your trading capital and investment in the one place.
19. Don’t be a one trick pony – If you have more than one live account, vary your strategies respectively. Don’t use the same trades and strategies across multiple accounts as this kind of defies the purpose.
20. Save some of your Profits – Don’t take all your profits out of your account. In the event of a margin call it is a good idea to have some of that capital available to recharge your account.
21. Don't take unnecessary risk – These are usually brought on by emotional responses both positive and negative. From overconfidence as a result of a good run, or stubborn fury from a series of losses. The driver is impulsive movements and this makes your trading unpredictable and therefore dangerous. Keep to your trading plan and be smart.
22. Don’t be a sheep – Just because everyone else is screaming and shouting about a trade it doesn’t mean you should jump in. In fact, it could quite possibly mean you should go against the sentiment. It is good to be aware of what is going on around you but don’t follow the crowd, trust your own analysis, the price and your system.
23. Keep Active and up to date – Complacency will cost you. If you want to maintain profitability then you need to make sure you keep up to date with a good Forex calendar, regular research and analysis and don’t think for a minute that you can relax on your market education. You must evolve with the market or risk falling behind.
24. There is no Forex Holy Grail – Sorry to burst the bubble, but no such thing exists. There is no perfect system, no fool proof EA or algorithm and the sooner you let go of that ridiculous myth the sooner you can focus on a more realistic approach to trading. Losses are a part of any successful system and should be treated as such.
25. Learn to harness losses – It is natural, at first, to be hurt by a loss. Instinctively we feel this as a failure but in forex nothing could be further from the truth. Each loss is an opportunity to learn, and every successful system should allow for an acceptable volume of losses. They are not a signal of failure unless they are happening more often than your gains, and your capital is falling significantly. Focus more on the bigger picture than the individual trade, to measure the success of your system, research why trades have failed when they did not pan out and see if there is evidence of possible tweaks to improve your system.