Forex trading rules are sets of forex trading guild lines that helps forex traders to develop a logical, intelligent, working and profitable approach to currency trading. Forex trading rules are systems of ideas and presentations that are generated from the observation of price action and fluctuation in the forex market thereby providing high probability methods to trading trend and countertrend setups by forex traders. Outlined are a number of forex trading rules.
MANAGE YOUR CAPITAL
The forex market has a reputation for moving fast. This is where protecting your profit comes in. in the forex market, gains can turn into losses within seconds and minutes and this fact makes it very critical for forex traders to manage their capital effectively. Every forex trading is made with money and protecting it is very vital even though at some point, the money might be one that is willing to be lost which is known as risk capital. There are two ways a forex trader can manage his/her capital namely;
- Trailing your stops: this is one of the best ways to lock in profits although it requires a lot of work. Trailing stops is seen as a process of setting near term profit targets. For example, if a forex trader’s near term target is 18 pips, as soon as he/she clocks 18pips in the money, the trader should have his stop to breakeven. Peradventure it moves lower and takes out the stop, the trade becomes a scratch whereby the trader will face no profit nor loss which is fine, but if it moves higher, with an increase in 5 pip each, the forex trader will slowly cash in gains.
- Trading in lots: A very great method of increasing profits and locking in gains is by trading more than one lot. Trading two lots give a forex trader the advantage of having two distinct profit targets.
LOGIC WINS, IMPULSE KILLS
A lot of money goes down the drain my impulsive forex traders who trade rashly. Trading impulsively is as simple as gambling. For example, a forex trader can rapidly rush into a winning streak but just one heavy loss can make the forex trader loss all the profits and capital back into the forex market. Forex traders should always consider going in for a logical trade which is more precise than impulsive trading. Logical forex traders will make solid decisions on how to limit their losses while impulsive traders are never one step/ trade away from absolute bankruptcy. Forex traders should trade logically by using fundamental and technical analysis to standardize his risks and time his trade entries.
NEVER RISK MORE THAN 2 PERCENT PER TRADE
This is the most common forex trading rule in trading. Forex traders are known to have an experience of losing one, two, three, four or even five years’ worth of profit in a single trade which went awfully wrong. For this reason, the 2 percent stop-loss rule must never be violated. No matter how sure a forex trader may be about the productivity of a forex trade, he/she should always keep in mind that the forex market can stay irrational far longer than expected. The 2 percent rule helps forex traders to never suffer a huge loss. For example, a forex trader losing only 2 percent per forex trade means that he/she would have to bear 10 repeatedly losing trade at a stretch in other to loss 20 percent of his/her account. Even if for instance, a forex trader sustains 20 stretch losses, the overall drawdown will still leave the trader with an average of 60 percent of his/her capital untouched.
TRIGGER FUNDAMENTALLY, ENTER AND EXIT TECHNICALLY
This is a great forex trading rule which brings about success in forex trading. Technical analysis is used by forex traders to forecast the future using historical price movements which are called price actions. However, fundamental analysis is used by forex traders to add economic and political news to determine the future value of a currency pair. Fundamental analysis is vital for identifying the broad themes in the market while technical analysis is used for the identification of distinct entry and exit points. Using both to make a trade move will yield great success in the forex market.
ALWAYS PAIR STRONG WITH WEAK
Adequate pairing is a major forex trading rule. When trading currencies, a particular forex trade involves buying one currency and selling another currency. In the forex market, one currency is always seen to beat out another currency which means that the utmost possibility trade will be to pair a weak currency with a strong one. This sole act gives the central bank a good reason to increase interest rates which in turn increases a country’s yield.
In conclusion, forex trading rules are key features to forex trading success, every forex trader should value and keep them at hand before venturing into forex trades.