10 Commandments of Forex Trading that can make you successful.
The Commandment I : You Should
Constantly Guard Your Capital
Without capital, you’ve got nothing to trade. Buying
and selling any forex, by means of nature, has evident risks involved. However,
you need to put down your capital on the table to gain profit. It is not
feasible to be right all the time, consequently, you need to guard yourself and
your margin account at all times. You’ll lose trades along the way, it is not
possible to avoid, but correct margin control will assure your chance of
winning to increase.
A Simple Rule:
Never have greater than 2% of your margin account at
risk at any time. Do not allow the risk to accumulate consecutively.
Losing trades are part of trading, however
minimizing the losses is crucial to success. Reduce your losses and let your
winners keep its position until target point. Constantly change with a stop
loss value. Studies have proven that investors who trade with stops make more
money than those who do not. If you are getting stopped out often the problem
is not the stop, it’s your entry!
The Commandment II : You Should Have
It is a very simple idea: plot your trade, and
execute your plan. Those who fail to do are likely to fail. Prior to buying any
position, you are ought to have a buying and selling plan for that currency.
1:1 risk-to-reward ratio is good place to start. Your trading plan need to
include the following factors:
- Scaled in entry points
on resistance/support lines based on technical analysis.
- Stop levels that
constitute the proper risk-to-reward ratio, which always result in an odd
number whose ending digit is a three or a seven. Ex) 110.13 or 110.17
- Definition of the point
where you’ll pass your stop to break even, including enough to cover the
- Scaled out exit points
for profit at key resistance/support levels based totally on technical analysis
- Always have a clear
target lines based on technical analysis, preferably two targets.
- The quantity and size
lots you are willing to trade in the currency loss.
- Be aware of all
upcoming fundamental announcements, the time they occur, and their influence on
Observe how the plan proves itself. You may have a
great plan, and it still can lose.
The Commandment III : You Should
Learn to Sustain, Endure and Be Patient
There is a saying “wait until the trade comes to
you”. For day-trading, you must wait for a currency to reach or break certain
points before placing the buy or sell order. Once you have the trade plan,
stick to the plan. You must let the entry reach the point that will maximize
your trade profit.
Master the “wait” trade as a part of your trade
The Commandment IV : You Should Scale
In or Scale Out
You should not enter a full position on a currency
in one order, unless there is absolutely 100% assurance on the profit
possibility. If not, you must scale into a position initially rather than
placing 100% of your lots. As your trade lose momentum, you should scale out of
the position. Scaling in is the practice of putting 2 to 4 planned entry
executions in a given trade at the appropriate price levels. Scaling out is the
practice of putting all of your lots into a trade initially and removing them
in halves or thirds as profits are realized.
You must look for several entries at key areas of
resistance/support levels, trend lines, fibs, or other targets on the charts.
The first trade always carries the most risk, but If your first entry is wrong,
you have second, third and fourth entry from your scaled in position. By making
a habit of Scaling in and out, you will not be tied up with too much margin
account capital in one currency at a time.
Ex) one 3-lot trade < three 1-lot trade.
By scaling in, you are minimizing the amount of time
the full amount of your capital is tied up in the trade.
Ex) Trading 1 standard lot < Trading 9 mini lots
Trading 1 mini lot < Trading 9 micro lots
Enter with 1/3 of your lots, adding other 2/3 only
after the trade proves itself.
By using this strategy, you have more entry and exit
opportunities. Scaling out of a position serves 2 purposes.
- It allows you to
increase your total gain and free up margin account capital while you are
trading. By taking profit on half or a third of the position at the first
resistance level, you can hold the remaining position for a larger gain, while
minimizing the risk of a losing trade. If that resistance level is not broken
on the first attempt, and the currency retraces, you can add another position,
or simply keep the remaining original position for an eventual breakout
above/below the support/resistance.
- It gives freedom to
trade capital for other additional currencies. This allows you to spread your
risk, to lose small and to win more often. You must maintain your margin
account balance so you don’t risk more than 2% of the total as you are adding
positions. Don’t take the risk of resulting in a margin call.
Your goal is to keep the trade consistent and short.
Enter at the lowest possible cost and have the lowest average cost. Scaled exit
on half of your positions when the first resistance/support level holds.
Holding the remaining half comfortably will work as advantage, because scaled
entries and exits are very closely tied to good margin management.
The Commandment V : You Should Use
Technical & Fundamental Analysis
The unspoken law is that short-term trading is based
on technical analysis and long-term trading is based on fundamental analysis.
However, for day-trading, you need both technical and fundamental analysis.
There are times fundamental announcements override
technical analysis in currency behaviors, but technical analysis rules except
for those overriding occasions.
You should make a habit of having no open trades
whenever a major fundamental announcement is taking place. Keep track of
several online sources of economic calendar announcements, then after the
announcement is released, wait for the reaction. If there is a strong reaction
to the news your stops are not guaranteed, if is safer to exit. You can always
For examining technical analysis, look primarily for
areas in the charts with as few obstacles to your trade as possible. These
“wide open spaces” will allow you to reduce the overall losses and still
maximize the profit. Once you make your comfort zone, wait for the proprietary
trade set up to materialize. Manager your trade to stay at the predetermined
The Commandment VI : Honor Your
Objectives and Your Stops
When your identified target is reached, you must use
stops. The only way to execute the trading plan is by honoring the parameters
you established prior to entering a position. Do not make changes to your
position that can alter the original risk-to-reward ratio you decided. The
basic rule is to use the last support or resistance, plus 5-7 pips, using an
odd number ending in a 3 or a 7, such as 90.13 or 90.27. Monitor your margin
account capital to avoid risking more than 1-2% of your margin account
accumulatively. You must know that with fractional pricing, you will get a
fractional difference in the spread at your stop, which can cause broker to
close your trade. Be aware that each time you move a trade to break-even point,
you have released your margin back into your cumulative balance, again making
it available to your 1-2% for other trades.
In Forex world, you can make use of leverage of your
account. Leverage controls a larger amount of currency with a small percentage
of your capital at risk. By utilizing leverage, you can look for multitudes of
chances as long as you don’t break your margin management rules. In 50:1 leverage,
you give the broker 1 part; the broker contributes the remaining 50 parts. If
you deposit $1,000 in collateral, you can trade $50,000.
If you trade without a stop, the entire $1,000
deposit is at 100% risk. However, if you put a stop loss in place at 30 pips or
$300, you have limited your risk at $300. Your stop is the best way to maintain
Honoring the profit target is as crucial as the
correct use of stops. When your profit goals are reached, then honor the target
point by moving your stops tight and locking in your profit.
If you voluntarily close a trade which then
continues in the same direction, you will blame yourself for the lost pips.
However, if your trade is stopped out by the market, and then continues as
before, that is just the market functioning its nature.
The Commandment VII : You Should Keep
a Written Trading Journal
For traders, there is always room for improvement.
You will always face ups and downs and you will be struggling to minimize the
losses and learn from each trading closure. Hence it is essential to achieve
consistency in trading, you should record your trading for a critical review.
Examine each trade and re-evaluate your strategy and decision. Going over the
right and wrong of your decision is a best way to make worth of trading
experience. By keeping a thorough log, you can make your own discipline and
find a pattern in your trading behavior. Over time, many traders grow their own
habit of mistakes.
Examples of mistakes include:
- buying/selling too soon
- giving back profit by
not closing the trade
- setting stops too loose
or too tight
- taking too many trades
at one time
- waiting too long to
enter a position thus missing trades
- being overly
- being in too many
high-risk trades that turn against you
- abandoning a trading
Take your time to review your journal, you are a
better trader if you are wise enough to learn from your own mistakes. When you
hit a losing streak and struggle at some point while trading, it’s better to
take a break for few days, then try paper trade for few more days to recover
your trading mind. After returning to trade, take smaller positions until
winning patterns are re-established.
The Commandment VIII : You Should Not
The hardest part of trading is waiting the market to
reach your target points. Majority of full-time traders, according to research,
spend more time on sidelines not trading than they do in position.
For day-trading, forcing trade means that you
entered a trade too soon, without chart confirmation or before the parameter set-up.
This may happen when you feel like you “need to do something”.
However, it’s a “wait trade”. You should not chase
trades up or down. If several entries are narrowly missed, you will only see
the trade turning against you. In many cases, it is best to do nothing and wait
for the best time to come to you.
As a Forex trader, you often spend an entire day to
several days accumulating positions without closing a trade. As your target
objectives slowly reached, you can lock in your profit and suddenly realize a
very good portion return over that period of time. Try not to sell too soon
over and over. Try to avoid the feeling of “need to do something” and try to be
free from the thought of making profit every day. There are only 1-2 REAL
chances per session. Even when you take a trade and scale in and out, it is
still only one trading opportunity.
After establishing a trading plan, let the trade
come to you. Do not be afraid of missing a few, and never force your way into a
trade. Simply be keen on changes and observe for the opportunity. There are
plenty of currencies and the market is 24-hours a day open. The trade you
missed is not the last trade in your trading life. Always remember forced
trades can lead into unreasonable decisions, which will lead into losses.
The Commandment IX: You Should Manage
It is not a mistake that most successful investors
are calm, analytical, and methodical. The emotional decision you make is
directly proportionate to your winning rate. Trading is all about calculating
risk vs. reward based on analysis, but even with the correct analysis, you
simply cannot keep the consistency in trading plan with emotion playing on its
own. The common emotion such as fear, greed, insecurity, stubbornness, and
justifying hope. The strength of your trading abilities must overcome your
emotions for you to become successful trader.
The Commandment X : You Should Become
a Disciplined Trader
There are various styles of trading such as
day-trade, breakout trade, intraday pivot trade, momentum trade, etc. Though,
the universal factor, regardless of styles, is that it must be disciplined. For
example, day-trade is a specific trading method, which consists of the
- Identify key
- Confirm the technical
logic in trading
- Accumulate positions
through scaled sells/buys at resistance/support level
- Use stops to protect
- Limit the total
investment in any one currency
- Identify buy/sell
- Move stops tight when
targets are reached.
Above all, discipline in trading means executing the
plan for each currency without being affected by your personal emotions. All
traders make rules for their trading, and their performance is influenced by
how much they follow their own rules. That is why Forex is called a mental
game. However, the process of becoming a trader with strong will is same as
becoming a better person, which we all are thriving to be every day.