Never Let a Winner Turn Into a Loser
If you notice that your trade profits are turning, take your profits before they become a negative. Additionally, if you enter a trade that is a mistake, cut your losses before it eats up your capital!
Logic Wins, Impulse Kills
Every time you make a trade, you need to understand the reason WHY you are making a trade. While the trend maybe your friend, also know the market dynamics that are driving THE TREND! Don't trade because you have a financial objective - that's the same thing as gambling. Trade because it makes sense. Be logical and practical. If you are up, never let greed get the best of you because then you will lose it all - and sometimes more. Don't bet the bank!
Never Risk More Than 2% per Trade
Currency trading is not like stock trading. You MUST have liquidity available. The golden rule for trading is for every $1000, never place more than 2 mini lots (20,000K). This is the equivalent of 2% of your trading capital. This is a very conservative way of managing your money. By doing this, you can be sure you will be able to stay in the game - even if you have a few trades work against you.
Trigger Fundamentally, Enter and Exit Technically
Fundamentals should be the reason you enter a trade (i.e market strength and weakness). However, following support and resistance (technicals) is the best way to be a successful currency trader.
Always Pair Strong With Weak
Currencies have personalities just like people. Never double on like currencies. For example, trend analysis shows that the EUR/USD acts almost identical to GBP/USD. However, there is a strong positive/negative correlation between the EUR/USD and the USD/CHF. If there is a strongly bullish EUR/USD trend, the USD/CHF will almost be (>95%) strongly bearish. Therefore, understanding currency correlationships is a MUST!
Being Right but Being Early Simply Means That You Are Wrong
If you place a trade before the fundamentals and technicals are proven often results in trades gone bad. Therefore, until the trend and analysis proves to come to fruition, avoid trading a pair.
Know the Difference Between Scaling In and Adding to a Loser
Sometime people enter a trade prematurely. They want to pull out of a trade as fast as possible. They then double the anti and pray they recoup from their mistake. Unlike in stock trading, this is the kiss of death. You NEED to know when scaling in is appropriate vs. adding to a loser. Scaling in is appropriate only when the trend has a mild setback but the sentiment remains strong. For example, if a trade has moved forward 80 pips but then scales back 20 pips, this could mean that the trade has temporarily lost steam or the volatility is lower. This is the kind of trade you scale into. HOWEVER, if the trade keeps in going in the opposite direction NEVER add to the position because you are simply adding good money to a bad situation. Do you like throwing away money. NO. Therefore, only scale in when the trend exists.
What is Mathematically Optimal Is Psychologically Impossible
When a new trader enters the FOREX market, they are excited because of the statistics they hear - they can make millions of dollars or trading is easy. Quite the opposite. Yes, trends can point in a direction and you can make a lot of money. FOREX trading is VERY LUCRATIVE but it can also make you GO BROKE if you don't properly plan mathematically and have a psychologically sound state. You need to plan for a reasonable risk reward. For most traders, they take a risk reward ratio of 1:1 or 1:2. That is ok. Optimally though, you want to go 2:1 or even 3:1. Most new traders though NEVER place stops and place their stops so far out but their profit targets so close. That is just a sign of gloom and doom. You should never extend your risk more than your reward. Do take into account that spread (they commission that is associated with the FOREX dealer. For example, you have a 50 PIP RISK and a 50 PIP REWARD. Your RISK/REWARD Ratio is 1:1. Realistically though, you should make it 50:52 or 50:53 because the spread is 3 PIPS. That still makes it 50/50. However, if you were to say a 50 PIP REWARS and a 500 PIP RISK, then your chances of profitability and maintaining your capital is lessened greatly. Therefore, optimize your trades realistically. Also, never become attached to a trade - because if you do, it generally means that the trade will fail or you did not do enough research. Confidence and research are essential to optimizing FOREX trading success.
Risk Can Be Predetermined, but Reward Is Unpredictable
You should determine how much risk appetite you have. If you have the means and the ability to handle more risk then go for it, but DO NOT OVEREXTEND YOURSELF. Do not spend money YOU CANNOT AFFORD to lose. Forex Brokers allow traders to use Credit Cards to fund accounts. NEVER ALLOW YOURSELF to use CREDIT - EVER!!! USE MONEY YOU CAN AFFORD TO LOSE. BEFORE YOU TRADE WITH REAL MONEY - PRACTICE, PRACTICE, PRACTICE on DEMO ACCOUNTS. Determine based on the amount of capital you have, your limit threshold before you trade. Once you place the trade, NEVER change the STOP unless of course you made a typo. If you make a mistake, move on to the next trade. However, if the trade is moving in your favor, let the trade continue until the momentum slows down.
No Excuses, Ever
If you have done the research and do the rules, the most you can do is wait for a trade to execute successfully. The end result may not turn out the way you want to every single time but if you do the work with due diligence, there will be no reason to ever make an excuse - ever. Logic and planning is KEY to currency trading success.
Remember, trading is an art rather than a science. Therefore, no rule in trading is ever absolute (except the one about always using stops!) Nevertheless, these 10 rules work well across a variety of market environments, and will help to keep you grounded - and out of harm's way.