The truth about Forex is that it can be an intense and stressful undertaking that requires a strong control of your emotions. Forex is not a "get rich quickly" scheme. Learning to trade Forex takes patience – it will take you time before you master the basics. Those who lack discipline or make decisions that are not carefully thought through will quickly find themselves in a negative investment position. Those who do not adhere to sound investment principles or who allow emotion to govern their thinking will quickly find themselves losing a grip on their investments. However, those who follow sound investment principles will reap the benefits of one of the world's most liquid and influential markets.
A 100% return on investment within a couple of days wouldn't surprise anyone, and in fact 1000% wouldn't surprise an experienced trader. Because of this, Forex has become one of the most sought after and talked about investment opportunities. As in any industry, Forex has its own nature and golden rules. Learn Forex, understand the keys to success, and make your investment decisions wisely. This short book will introduce you to the 10 golden rules of Forex trading that every person entering this exciting market should follow in order to become successful.
1. The market is always changing and it may be hard to understand and keep up with these changes unless you invest in a good Forex trading education.
2. There are many beginners who make trades in any direction. While there is a possibility to make profits both on the upside and downside of a trade, trading in the direction of the trend will give you the best chances for success.
3. Make a demo account, and use it to learn and understand Forex trading. While using a demo account you will be able to test your trading strategies and mentally prepare yourself for real trading. However, keep in mind that you should be realistic and treat your demo funds as real money; otherwise, there is no way you can learn from demo trades.
4. While there are a lot of companies who make money by selling software which aims at predicting future trends, the reality is that if this software really worked, these companies would not be giving the secret away.
5. Trading is stressful work, and there will be a lot of setbacks on your way to the peak. Emotional trading may force you to open a trade too early and eventually lead to a loss due to a wrong entry point. Control your emotions by staying cool and calm, and focus on your long-term goals.
6. Just because the Forex market is online twenty-four hours a day does not mean that you have to trade all that time. If you are doubtful, do not trade at all. Instead, analyze the market and use the knowledge you get to make more profitable trades in the future.
7. Because trading is always full of emotions, you must have a trading strategy which includes a set of rules you stick to. This will help protect you from yourself.
8. Avoid trading strategies which are too complex to understand and which use a lot of different techniques. They can distort your judgment and you will miss a lot of good trading opportunities.
9. Leverage - Forex trading has large potential rewards, but also involves large potential risks. As a novice, don’t risk more than 1–2% of your margin account on any given trade. Over the long run, this will give you a chance to make a profit while reducing the probability of taking a loss.
10. Develop a habit of reviewing and analyzing your good and bad trades. Then you will have a much better sense of what will work best in your future trades.
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12. Buy the first pullback from a new high. Sell the first pullback from a new low. There's always a crowd that missed the first boat.
13. Buy at support, sell at resistance. Everyone sees the same thing and they're all just waiting to jump in the pool.
14. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.
15. Don't buy up into a major moving average or sell down into one. See #3.
16. Don't chase momentum if you can't find the exit. Assume the market will reverse the minute you get in. If it's a long way to the door, you're in big trouble.
17. Exhaustion gaps get filled. Breakaway and continuation gaps don't. The old traders' wisdom is a lie. Trade in the direction of gap support whenever you can.
18. Trends test the point of last support/resistance. Enter here even if it hurts.
19. Trade with the TICK not against it. Don't be a hero. Go with the money flow.
20. If you have to look, it isn't there. Forget your college degree and trust your instincts.
21. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.
22. The trend is your friend in the last hour. As volume cranks up at 3:00pm don't expect anyone to change the channel.
23. Avoid the open. They see YOU coming sucker.
24. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.
25. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.
26. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.
27. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.
28. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.
29. Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight.
30. Beat the crowd in and out the door. You have to take their money before they take yours, period.
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Trading Forex, the international currencies market, can be risky. But there are some rules that will help you reduce your risk and increase your chances of trading profitably.
Use a Stoploss
Using a stoploss properly can at least prevent a trade from wiping out your trading capital. But it can also lock in your profits, if you manually trail the stoploss. A common and effective way of doing this for long trades is to move the stoploss just under the most recent swing low. For short trades, move your stoploss just above the most recent swing high.
Use Minimal Leverage
Leverage is the financial device that lets $10 of your trading capital control, for example, $1,000. The more leverage you use, the more you stand to gain---or lose---on any given trade. Since tiny gains won't kill your trading career, whereas huge losses will, it makes sense to use the minimal amount of leverage. Increase your leverage only when you're consistently, confidently profitable. And when that occurs, use only the leverage you need to reach your goals.
Risk No More than 2 Percent on Each Trade
When you risk two percent of your trading capital on each trade, you're giving yourself a chance to make a profit while reducing your chances of financial ruin. Even a string of losses would likely still leave you capital to trade with. See http://www.investopedia.com/university/forex-rules/rule3.asp for some sample calculations to convince yourself of the 2 percent rule.
See the Bigger Picture
Though you might prefer trading on smaller timeframes like the one-minute chart, draw the major support and resistance lines from higher timeframes. These lines greatly impact price action on lower timeframes. At minimum, draw lines for daily and four-hour swing peaks and valleys and Fibonacci levels.
Don't Chase after Price
Price may momentarily shoot up only to tag a resistance line before resuming its long dive---and blowing up the long trade you rashly entered. Let price come to the zones that your pre-trade analysis has suggested will give you the best chance of profit.
Trade with the Trend
There are successful traders who trade against the trend, but they know their strategies like they know their own names and can read price action like a book. If your skill level is anything less than that, you're stacking the odds against yourself when you buck the trend.
Use Fibonacci Levels
Price may look like it's reversing when it's only retracing--a natural, normal and common aspect of price action. But you won't know that unless you use your trading platform's Fibonacci tool.
Seek Confluence and Confirmation for Each Signal
The axiom "there's strength in numbers" holds true in trading. A support level is much more likely to hold when it overlaps or nearly overlaps other support levels. Draw a variety of support and resistance lines to see these overlapping levels. Use Fibonacci, trend lines and prior swing peaks and valleys, for starters.
Take Losses in Stride
Successful traders know that losses are a natural part of trading. Rather than mourning your losses, learn from them.
Review All Trades Regularly
When you make a habit of harvesting the good and the bad from each trade, you'll have a much better sense of what will work and what won't in future trades.
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