After interviewing successful Traders I realized there were many ideas that they had in common. I was told numerous times that to be successful and stay successful a Trader had to adhere to several rules. Two of them are:
Forex Currency Trading Beginner Rule 1:
"Always Trade with a Stop Loss"
Before you place a Trade it is important to realize that even with a winning system you WILL have LOSING Trades. The idea is to gain Maximum Profit and Minimize your Loss. The decision on when to close the Trade must be made before you place your Trade, it can then be made without emotion and it will be easier to stick with your Plan (This is a must).
When you place an order you can manually select when the trade is going to end. To do this you state how far you will let the trade run at a loss before the trade ends. This is called a "Stop Loss Order". Basically this means if the trade goes against you, you can control your loss. This is a common way to safe guard against heavy losses.
There is always a down side to using stop loss orders. It is too easy to focus on reducing your possible losses so if there is a small change in the direction of your trade you will be cut out with a small loss and you will also be charged the spread, often the trade changes back to the direction you had anticipated which then runs on and would have given a nice profit.
If you are trading in short time frames and finding yourself being stopped out after small losses you will be surprised at how quickly the broker's cost (spread) can mount up over a month. Therefore it is extremely important to either use a system that will guide you where to place your stop loss or to understand exactly where to place your "Stop Loss" and the consequences of it. Sometimes allowing for a slightly larger loss before being stopped out will give you more successful results.
Every trader has to have an individual strategy and rules they are prepared to stay with. Today there are software programs you can buy that will assist you with these decisions.
Forex Currency Trading Beginner Rule 2:
"Risk Reward Ratio"
Understanding your risk/reward ratio is very important (the risk compared to how much reward (profit) you will make).An example of a trade with a 4:1 risk reward is if you have a stop in place so the maximum you could lose (risk) is $1000 and your limit order allows for a profit (reward) of $4000.
Always consider the risk reward factor before placing a trade. Most good traders would look at a 2:1 ratio, your profit being twice your potential loss. When working out your trading always remember to deduct the spread from your anticipated profit. Working out your risk reward ratio is a simple formula. I will give you an example.
Currency Pair EUR/USD.
Buying # 1 lot
Entry price 1.3330
Stop 1.3310
Target 1.3372
Loss 20 pips
Profit 40 pips (net after spread of 2)
Ratio 2:1
If the system you are using indicates where the entry and exit points are and a ratio of 2.1 is not realistic it is better not to take the trade and wait for the next opportunity.
I hope you found this information helpful and I wish you good luck with your trading.
