Forex Trading Tips – 10 Rules to Live By
1. Never trade with money you can’t afford to lose. If money is tight and you are having trouble paying your bills, you should not trade the Forex market. You could however use the time to demo trade so that you can trade comfortably when you have some risk capital. Do not borrow money to fund your trading account.
2. Always demo trade first. Trading with a demo account allows you to become familiar with the broker as well as placing orders with the trading software. It also allows you to experience Forex trading without risking any of your own money. Always demo trade for 2-3 months or until you are consistently earning pips. If you cannot trade profitably with a demo account, things won’t magically change when you start trading your own money.
3. Always trade with a stop loss order in place and only move it to lock in profits as the market moves in your favor. It’s not enough to have a mental stop loss because markets can spike quickly and cause significant losses to your account balance before you have a chance to close the trade. Even worse, you could lose your internet connection and have no way to close out your position. You should never move your stop loss order if the trade is going against you – leave your stop in place or close the trade and cut your losses.
4. Keep your emotions in check. Fear and uncertainty can cause you to exit a trade prematurely. Greed can cause you to give back some or all of your profits. Never try to take revenge out on the market after a losing trade. It’s difficult to trade with no emotion however if you don’t control your emotions you will lose money.
5. Use leverage responsibly. Just because your broker offers 200:1 or 400:1 leverage ratios does not mean you should it. Leverage is a double edged sword – it can compound winning trades or it can completely wipe out a trading account after just a few losses. If you must use high leverage, try to use 50:1 or 100:1 leverage until you have more capital in your trading account.
6. Practice responsible risk management. Use a lot size and stop loss placement that never risks more than 2-3% of your trading account per trade. This ensures that your account can survive a number of consecutive losses before you start seeing some winning trades.
7. Cut your losses short. You should always have a stop loss order in place to limit your risk and to get you out of a losing trade; however you do not have to wait for the market to hit your stop in order for you to close out your position. If price action indicates the trade is not going to work out in your favor, then don’t stay married to that trade. Cut your losses and move on to the next trade.
8. Let your profits run. Use trailing stops to lock in profit as the market moves in your favor. Do not close the trade prematurely, however don’t try to squeeze every last pip out of each trade or you will end up losing some of your profit. Let the market and/or your trading plan dictate when it’s time to exit a trade. Remember – pigs get fed and hogs get slaughtered.
9. Always trade with the trend – the trend is your friend. Think of the trend as a river. Trying to swim upstream can not only be extremely difficult but it can be deadly too. Determine the overall trend on a time frame larger than the time frame you plan to trade and then wait for a trade to develop that allows you to trade with the prevailing trend.
10. When in doubt stay out. Sometimes the best trade is the trade not taken. Don’t try to make a trade out of nothing. Only take trades that are clearly defined by chart formations, confirming indicators, trendlines and/or price action around areas of support and resistance.
Forex trading doesn’t have to be complicated and overwhelming. Observing these 10 Forex trading tips will ensure that you have an advantage over other new traders. Living by these tips will help you avoid many common mistakes and put you on the fast track to Forex trading success.
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