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Forex trading golden rules

golden rule book

Over the past decade, the foreign exchange or Forex market has become the largest financial market in the world.

The Forex market is also widely accessible and plenty of resources are available.

But traders are often discouraged by not seeing profit from it.

Why?

Well, like most things in life - FX trading takes consistent discipline to yield success.

What most successful traders have in common is the discipline to follow the basic Forex trading rules.

The 8 essential Forex trading rules:

These rules help you understand the market and can improve your skills as an FX trader - so we suggest learning them.

And practice makes perfect right?

So once you've applied these golden rules of Forex to demo account trading and feel ready to trade for real, you can open a live account.

Start trading with live account

1. Start slow

Don't expect to make significant profits from day one.

Most novice traders face a common problem:

...they lose money...

...and end up out of the game quicker than they would have anticipated.

It's common for traders to double their capital within their first week of trading - then lose it all soon after because of over-confident trading.

Trade small and build-up profits slowly.

There are very few traders who succeed in the early stages of their career.

It takes time and patience.

2. Have a trading plan

Having a trading plan is one the golden rules of Forex trading.

This holds true with any activity.

A person with a plan is more likely to succeed than someone without it.

You should have:

  1. your trading strategy outlined
  2. exit and entry points explained
  3. stop-losses and take-profits set.

Adhering to the plan is the main element in your trading.

What you should note here is that the plan can be modified, as change drives improvement.

Modifying your plan should only happen when you have no positions opened.

Do not modify your plan so that you can just keep the losing position open for a longer period.

3. Minimise losses by setting a stop-loss

This technical advice should be fundamental to your trading plan.

But just in case - set a stop-loss.

As previously mentioned, many novice traders lose capital and are unable to move forward.

Setting a stop-loss means minimising your losses and having capital available to trade for another day.

This is a general rule that every trader should adhere to and it's one of the top Forex trading rules.

A stop-loss:

  1. sets a limit at which your losing position will be stopped, and
  2. by doing so, you are deciding on how many pips you can afford to lose.

For example, once you purchased one lot of EUR/USD at a price of 1.15000, you may set your stop-loss at 1.14980.

This way you are limiting your possible loss to 20 pips.

It's important to note here is that there is no guarantee of a stop-loss

...because sometimes market liquidity is not available at the selected price…

...so your stop-loss will be executed at the next best available price.

A common error with novice traders is that they forget about stop-loss placements, because they feel that constantly monitoring price changes will suffice.

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.

4. Keep your emotions aside

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

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

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

So if you:

  1. don't think you can focus solely on trading during a session, you should not be trading
  2. are not in a good mood, take a break from trading and return when you are feeling better.

Trading when you are too excited can be just as detrimental.

We all know how easy it is to make decisions without thinking clearly.

Trading is generally a manual activity, which needs to be done with the highest level of discipline and structure.

5. Always analyse and learn

Your trading history is the source of your knowledge.

Get the most benefit from this, by exploring what you have done in the past and analysing how the market behaved at this time.

Establish these review sessions on a daily or weekly basis (depending on the frequency of your trading) and assess how you can improve your trading strategy.

Learning from others is great:

...but you should first try learning from your own mistakes and successes.

Don't focus only on the losing trades - sometimes analysing profitable trades can be even more beneficial.

And even if you have been making losing trades:

...if you learn from your mistakes…

...you have gained valuable knowledge and experience to adjust your strategy with.

After all, what's the point of analysing if you don't learn from it?

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6. Adapt quickly

Market behavior tends to change.

So it's vital to modify your trading strategy and adapt quickly, by consistently adding new items to it.

The scope of the Forex market is enormous and so is the scope of the items you can learn about it.

Do not think that if your current trading strategy works, it will work over a long period of time.

Successful Forex trading requires you to follow the rules of currency trading including:

  1. correct implementation
  2. analysing
  3. learning.

Learning and adapting from trades, should be a repetitive process.

If you stop analysing and learning, then you stop growing as a trader.

7. Move to live

No matter what kind of rules for Forex trading you follow, you have to trade on a live account eventually right?

Demo account trading is highly recommended as a stepping stone for every novice trader.

But remember:

...even if you trade well on a demo account...

...you will never be able to cash out your virtual balance.

Demo account trading is only useful when you are doing it the right way.

The first thing to do, is open a demo account equal to the size of your potential deposit.

free demo account

Then you should set yourself a target that you want to achieve.

It can be anything, but it should be measurable.

For example:

  1. 100 gained pips in four weeks straight; with
  2. positive profit and loss.

Once you achieve this target, you may want to move to live account trading.

But note that you should only start trading Forex live, when you are:

  1. comfortable using the trading platform; and
  2. are aware of risk management.

And rather than overtrading on a demo account - set yourself a target and work toward achieving it.

8. Don't waste time

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

For this reason, you should only consider this activity if:

...the time spent on trading Forex constitutes a higher value for you...

...than time spent doing any other job.

Let's look at an example.

Imagine you also work another job with an hourly rate of 15 GBP and you have opened a trading account with 1,000 GBP balance.

Let's say you are a successful trader who makes 5% of your balance, or 50 GBP.

If it takes you more than three hours to achieve this return, you are losing money because you would probably make more money doing your regular job.

That's why profit factor is one of the main rules of Forex trading.

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.

Forex should be an activity that makes you money.

So opportunity costs should be considered.

Nevertheless, you don't have to risk more to earn more in Forex, you just have to:

  1. increase the volumes of your trading; while
  2. proportionally increasing the size of your trading capital.

Wrapping-up the golden rules of forex trading

  1. Start slow
  2. Have a trading plan
  3. Minimise losses by setting a stop-loss
  4. Keep your emotions aside
  5. Always analyse and learn
  6. Adapt quickly
  7. Move to live
  8. Don't waste time

These rules are simple to understand and implement, yet there are many who find them hard to follow with the necessary degree of discipline.

What you should remember is that Forex trading requires a systematic approach.

If you can't follow simple guidelines, you will find it difficult to develop a successful trading strategy and become a great Forex trader.

And remember, there's no easy way to make profit - it takes a lot of time and effort.