Forex trading strategiescan be as varied as the traders that implement them. Nevertheless, once a trader decides to learn forextrading, they can then develop a trading strategy that will best suit their needs, personality and preferences.
Most forex trading for beginners courses include specifics about the market, but they often fall short as far as teaching novice traders how to avoid trading mistakes. This article will give the beginner five golden rules for currency trading that can be considered before they start taking forex positions.
The five golden rules of forex trading listed below will help orient the prospective forex trader in a positive direction, and they contain a wealth of forex trading wisdom that can be immediately applied to enhance your trading success.
· Rule Number One - Always use stop loss orders to ‘cut your losses short’. In order to limit losses and maximize potential profits, limiting the amount of money at risk has always been a primary consideration for every successful forex trader. A stop loss sell order is generally placed below the market when buying to exit the trade if it has reached the trader’s maximum loss tolerance. A stop loss buy order is placed above the market if the trader has initiated the position by selling.
· Rule Number Two – Have a target for exiting the trade. One of the wise sayings traders have expounded for years is ‘let your profits run’, although having a target in mind where it would be appropriate to take profits will avoid you riding a profit into a loss, and it gives the trader the opportunity to step back and re-assess the market before re-entering. Placing a stop-loss and a take-profit order when initiating a trade is an excellent strategy and this practice can save the trader time, money and frustration.
· Rule Number Three – Do your homework. Applying some sort of analytical discipline when researching the forex market can give the trader valuable information on when to enter and exit trades. Analysis of the forex market is usually divided into technical and fundamental analysis. Technical analysis is generally done with the trader studying past patterns on price charts. Fundamental analysis involves studying changes in a country’s economic and political situation to determine which way a trader should position themselves in a particular currency pair.
· Rule Number Four – Know when to stay out. The excitement of trading can be addictive and can lead to one of the most damaging habits for a forex trader: overtrading. Overtrading generally confuses the trader and it will often cause the trader to begin losing money and paying away spreads unnecessarily. Of course, a trader could also see a lucky string of winning trades, but that does not happen often enough, and when it does occur, the trader could later lose all their profits if they continue to overtrade when their good luck runs out.
· Rule Number Five – Be disciplined and put your emotions aside. Having a plan and implementing the strategy that has worked best in the past will help establish the discipline that a trader really needs to exercise when trading. Sticking to a plan in disciplined manner rids the trader of emotional reactions when trading and gives the trader a solid basis for limiting losses and letting their profits soar. Most online forex brokers offer demo accounts that can be used to test out strategies with virtual money before the trader commits any real funds.