Five Forex Trading Commandments

By Author: Jubair Ahmed
Total Articles: 5
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Most would-be forex traders quickly fail. Here are five forex trading commandments that you should use. These are proven to help forex traders survive and thrive in the market.

1. Trade an effective system

Firstly, an effective trading system is a must when it comes to successful forex trading. A good trading system provides the trader with signals showing when to enter and exit positions. It should have a positive expectancy, which means that on average, it should make money. Remember to test your system against live and historical data before trading with it.

Having an efficient trading system gives the trader a fair chance to win in most of his trades and minimizes losses.

2. The trend is your friend

In a forex market, three types of trends can be seen which includes short, medium and long term. The successful traders follow the medium and long term trends which are easy to recognize. Changes in these trends occur due to economic movements. Since the economy of a country changes at a gradual pace, so do these trends.

Trading short term market movements involve more trading costs ...
... and smaller profits, with more risk of volatility. Therefore, following the long term trends is preferable.

3. Avoid overtrading

Less trading with a larger profit margin is far better than overtrading, working yourself into a frazzle and paying high broker costs. For example, getting 15 pips from a trade means you will have to pay 33% of your profit to the broker as fee while gaining 150 pips from a trade reduces the cost to 3%.

You should also undertrade by not opening too many positions relative to your trading capital. Just because you have enough margin to trade 10 positions doesn't mean that you should

4. Use a longer timeframe

The timeframe is the duration of keeping your position open in the market.

Make fewer trades, but follow longer term trends. Not only will you be more relaxed, you will also earn more profits from each trade, and reduce your trading costs.

But in these cases, you may need to withstand some adverse short term movements. Make sure that you have enough trading capital for your selected timeframe.

5. Use stop losses

Always use a stop loss to protect your trading capital.

A stop loss is the point where you decide that you have made a bad trade. This is the level of risk you are taking on for each trade. A stop loss helps to minimize your loss by closing a trade when the market moves against you. Your forex system should determine your stop loss based on your own risk tolerance.

By following these five simple trading commandments, you are maximising your chances of success.