Undertrade rather than overtrade

The more you trade, the more tired you will get, the smaller your profits per trade, and the higher the proportion of your profits will be paid in broker expenses. If you are making only 15 pips per trade, and paying 5 points in brokerage, than that is 33% of your profits. If you make 150 pips per trade, your costs are only 3%.

Beginners typically choose trading systems that generate thousands of trades per year. It is difficult to be profitable in this case – slippage and costs become a problem, and you need to constantly watch the market. Choose a trading system that trades less often, but makes larger profits per trade to ensure your long term profitable survival.

Be careful trading news

It is often tempting to take positions in front of news releases. If you get the direction right, you could make hundreds of pips. However, the reverse is true also.

Longer term traders are seldom concerned about news. If you use a shorter time frame approach, then don’t take a position in front of a trade. Wait for the release to occur, then take your position, but be aware that the market can reverse direction suddenly.

Choose your timeframes

Timeframes are the periods of time that you keep a position open. The shorter the timeframes, the more actively you will need to trade, and the higher your trading costs, and the smaller each trade will be. This equates to more risk, more effort and less profit.

However with longer term positions, you may need to withstand large adverse movements against your position, and there will be fewer trading opportunities, so you will need to be more patient. Select a timeframe that balances your capital and risk requirements against trading effort and profitability.

Use stop losses

A stop loss limits the amount of risk that you are exposed to for each trade. You can set it up for your trade through your broker. A stop loss will automatically become an “at market” order when the market touches or exceeds the stop loss point.

Your trading system should be able to define the stop loss levels for each trade, depending on your own risk level, time horizon and market volatility.

A stop loss should be triggered when the market shows that you have got the direction wrong. Don’t set your stop loss so close to the market that it is triggered by random movements.

Conclusion

To minimize the risk and maximize the profitability, it is important to follow some specific forex trading rules. By having a trading system with positive expectancy, trading the long and medium term trends and using stop loss, you can maximise your chances of success in forex.

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Tags: forex trading rules

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