Golden rules of Forex trading

The forex market is a total hell. The most risky market in the world.

Trader at the gates of hell forex
And to survive on it, you must observe the basic rules of work in the foreign exchange market.

Forex is one of the most risky businesses in the world. And when deciding to deposit your own money to a forex-broker, you should be aware that you have entered the gates of hell.

“Abandon all hope, ye who enter here” (Italian. “Lasciate ogni speranza, voi ch’entrate”) – the final phrase of the text over the gates of hell in Dante Alighieri’s Divine Comedy. These words should become the motto of any trader in the forex market. No hope, only a cold calculation and a trading system.



In this article I have collected the basic rules of the forex market, simple following which will allow you to secure your deposit and significantly increase the profitability of work on Forex. These are very simple and in most cases all known rules.

1. Trend is Your Friend.
The most famous rule. Everyone knows it. It is included in all books and textbooks on forex. But from this it does not become less important. Does everyone follow it?

As we know from the principles of trend movement and the basics of technical analysis – the movement of prices in financial markets tends to move in a certain direction. This direction is the trend. Opening trades in the direction of the trend has a much greater probability of obtaining a profit as a result than trading against the trend. Most profitable strategies in any financial market are based on the principle of following a trend. Trading against the trend turns into an end to the struggle with the market and has a very negative impact on the psychology of the trader.

The main problem in following a trend is that the trends are very clearly visible on the history. The alternation of impulses and corrections often (and not without reason) is misleading. But this is the difficulty of working in the foreign exchange market. For more details on determining trends in the foreign exchange market, see the article “How to determine the trend and its reversal on Forex“.

The simplest and most effective way to work with a trend is to consider it as a trend in the market from reversal to reversal. But then you need to understand exactly what the trend reversal is and how the reversal models look. This is here – “Reversal models in the forex market“.

2. Don’t Catch A Falling Knife.
You can cut yourself or at least hurt your deposit. This rule follows directly from the previous rule. A falling knife is called sharp and highly volatile movements, usually associated with the breakout of key levels zones or the release of important news.

Don’t Catch A Falling Knife

It is not possible to determine when a strong and directed movement is over. It is much more profitable to try to join this movement on kickbacks. “A falling knife” does not mean that the movement can be associated only with the fall in the value of the asset. This rule also works for sudden upward movements. “Short squeeze” just from this series. However, this common expression – “falling knife” very clearly reflects the property of financial assets to fall in price much sharper and more volatile than growth. And this applies not only to the currency market, but also to other financial assets (shares for example).

3. “There is always another trade”.
This rule I heard from Adam Button from the well-known online forex-resource ForexLive and I really liked it. Adam has dedicated a video to this rule and I advise you to familiarize yourself with it. He called this rule “mantra”. Thank you Adam for this mantra.

This mantra tells us that you do not have to enter every trade or work out each signal, especially if you do not clearly understand the situation on the market at the moment or you are not sure, or you have a bad mood and not the most successful day. There will always be another deal that will allow you to earn with minimal risks. Do not worry about missed opportunities or missed good moves. The forex market was, is and always will be. And you will definitely have great opportunities to enter the market and open a deal.

Wait for your deal, be patient and the market will reward you. Your psychological balance and calmness is much more important than unjustified risks and stress associated with losses and haste. Be calm and remember – there is always another trade.

4. Frozen rabbit syndrome.
This expression of psychology, figuratively describing the state of stupor under the influence of a sense of fear. A person seems to freeze and becomes unable to respond quickly to the situation and make logically correct decisions. As a rabbit in a daze rises in the headlights and can not escape from the beam, which usually ends tragically for him.

Rabbit at the headlights

With reference to the forex market, this rule I met at popular book Linda Bradford Raschke and Laurence A. Connors “Street Smarts: High Probability Short-Term Trading Strategies”. Here is what she writes in her book:

“This leads us to the most important point: the initial stop orders are mandatory! Each strategy in this book will require you to put out a protective stop after the position is opened. The stops are necessary for your defense if it goes wrong. “(Remember, we only trade on probabilities .) All that is required to nullify the positive results of the previous 20 deals is once in a bad deal to relax or experience the “frozen rabbit syndrome.” The placement of the original protective stops should become a habit. As you will see, in most instances, if not in all, your stops put only a small amount of money at risk”.

Greed and fear are the basic feelings affecting the brain of the trader. The hope that the market will unfold and your losing position will close in profit or without loss is the main mistake of beginning traders. As a “frozen rabbit” you continue to observe how the price goes against your position and losses increase as a snowball. The stupor does not allow you to take the only correct decision – to close the losing trade, take losses and trade further. I think all novice traders experienced a similar feeling.

Remember about “frozen rabbit syndrome”, put the stops and do not violate money management. In the currency market, you compete not only with people, but also with algos that do not know emotions. To win this war, you must be like a robot – without emotions, clearly work out the signals of your system and comply with risk management.

5. Trade what you see.
A common rule, but what does it really mean? The expression “trade what you see” is used in opposition to the expression “trade what you want to see.” This rule reflects the need to make trading decisions based on an objective and qualitative analysis of the current market situation. It’s about making trade decisions based on the objective situation in the market that you see. In opposition to trading on the basis of how you would like the market to behave.

Most novice traders make their decisions based on emotions, psychological impulses, technical indicators – based on anything, except price action, which they see on the market. As a result, there is a substitution of objective analysis of the market for the analysis of the desired development of events – the desired is given as valid. And trading in the foreign exchange market turns into a constant hope that the market will go in the direction you need.

Examples of such erroneous decisions each trader knows a lot from his personal experience. For example: “The euro is falling in the market, but I bought it because the RSI indicator went out of the oversold zone and exceeded the value of 30”. You see how the substitution of concepts occurs. The trader sees that the euro is falling. This is reality. But he buys it on the basis of substituting reality, that some technical indicator has come out of some kind of conditional zone. This substitution of concepts in its pure form. The trader is waiting or wishing that the euro will grow. And adjusts the market facts to this vision, finds an excuse for the transaction. He does not trade what he sees, but trade what he wants to see.

 Trade what you see

This common mistake is based on human psychology. The brain is so arranged that it automatically loses the probable future scenarios in order to fulfill the person’s desires. As a result, a trader sees in the market situation what he wants to see, and not what is real and opens deals in accordance with an imaginary reality.

How to deal with this – here are some tips.

  1. 5 seconds Rule. Before you open a deal, pause for a few seconds and ask yourself – is this really a deal you must open? Take a few deep breaths and objectively look at the situation on the market. Determine the price where you place the stop-loss and this level will mean that your analysis was incorrect. If you can not understand where to put the stop-loss correctly – do not enter the market, you do not understand it. Very often in these few seconds the market gives you to understand that you are wrong.
  2. Wait for one more candle on the chart. Many mistakes are made because of early entry into the market. Not sure – do not rush. Wait for your price or confirm the correctness of the decision. The next candle will either confirm or disprove your plan.
  3. Analyze successively the candle behind the candle of your chart, on which you want to open a deal. What do the last candles tell you? What are the solutions of the traders behind these candles? Is this consistent with your original plan?
  4. Write down and put before your eyes the list of criteria for your trading system for opening deals. Turn this list into a checklist and fill it in before opening each transaction. Formalization is an additional objective control over the situation and the elimination of emotions.
  5. Do not trust someone else’s opinion and take full responsibility for open transactions. Do not shift responsibility to other people, traders, experts. This will allow you to avoid the illusion of hope and bias that there is someone smarter and more experienced than you. Responsibility for the transaction will allow you to quickly become aware of your mistakes and cut off losing trades.




6. Trade what you see and don’t think

Another aspect of the previous rule. He accentuates us that there is no need to search for an explanation of the current movements in the market. You must follow the rules of opening transactions of your system, and not seek explanations for why the market is growing or falling. The foreign exchange market is the struggle of buyers with sellers. At some point, one of them wins and the market goes under his control and the trend begins. Sometimes the trend stops and there is a pause in the market – it’s flat. After it there will be a trend. A logical (or not) explanation for the question “Why?”, you can read a little later in numerous analysts on a huge number of information financial portals. Notice how the past movements can easily be explained by “experts”, but are one of them can foresee future movements?

You came to the forex market in order to make money, and not to seek explanations for this or that movement. Leave this case to numerous experts and analysts.

7. K.I.S.S. method

I have already touched on this approach in the article “What is the technical analysis on forex and how to apply it correctly“, but the importance of this methodological approach allows us to dwell on it in more detail.The KISS method (an acronym for “Keep It Simple, Stupid”) is a principle that has come into financial and technical analysis from design.KISS is a design and programming principle in which the simplicity of the system is declared as the main goal or value.There are also other versions of the decoding of the acronym. example: “Keep It Sweet & Simple”, “Keep It Short & Simple”, “Keep It Simple, Sweetheart”, and even “Keep It Simple, Sherlock”.

KISS method on forex

Each time making a choice or taking a trade decision, it is necessary to make sure that the solution found is the simplest possible, whether it really solves the problem, and does not complicate the situation. To do this, the rules of the KISS method will be useful:

1. The action taken must solve the most important problem in the simplest way.
2. You do not have to make a decision more difficult than the original problem.
3. Do not change the rules of the game on the go. Follow your system.
4. The decision should be flexible and provide for the possibility that everything will go wrong, as you originally intended.

First of all, the KISS method is mandatory for use in technical analysis on the foreign exchange market. The price is a primary, indicators and other mathematical methods applied to the price can significantly complicate the adoption of trading decisions. But regarding the process of trading in general, this method is very well applicable.

8. Cut Losses and Let Profits Grow.

You have heard this expression a thousand times. In any financial market, you are trading the future. The future is not given to anyone. There is no person in the world who knows where the price for a particular asset will be in the future. No expert in the world knows this. You (and all other traders) trade the probability that the price will go to a certain direction. So there is a high probability that your analysis was not correct and you were mistaken. Just accept it. This is reality. But a very simple mathematical calculation tells us that if your profitable trades are greater than your unprofitable trades, you will already trade in a plus. That’s all. Everything is very simple. Even with the same number of loss-making and profitable positions, the average profitable position should be greater than the average loss-making position. To do this, simply your stop-loss should be less than your take-profits orders.

Your trading system should provide for the opportunity as long as possible to be in a profitable trade and to close as quickly as possible losing trades. There are a lot of methods for calculating the money management system. Determine the most suitable for you and follow it. You can not control profit, because it lies in the future, you can control only losses. They are in front of your eyes in your trading terminal every second of a second. By opening a trading position, you are already at a loss due to the spread and trade commissions of a forex broker. Do not let them grow. If you suffered a loss of 25% of your deposit, then you need to earn 33% to return the deposit to its original state.

Use stop-loss. Determine the price of the stop loss order until the opening of the trade. This is the point where your analysis was not correct. Pull up stop-loss orders. Carry out a stop-loss order in a break-even. If the market took out your stop, then there is a reason for this. Even if you correctly defined the direction of the market, you will have the opportunity to enter the market again at a more favorable price. Fight for your deposit, protect it – this is your main means of production. Without it, you can not trade.
Do not forget about the “frozen rabbit syndrome” and cut your losses, and let the profits grow.

9. Buy the Rumor, Sell the Fact

Buy the Rumor, Sell the FactA fundamental rule, perfectly working in the foreign exchange market. Its meaning is the simple fact that if you expect the value of an asset (stocks, currencies, bonds, gold) to grow in the future for any reason, it is advisable to buy this asset now for speculative earnings in order to sell it more expensively in future. Thus, the markets are moving with the expectations of investors and speculators about future changes in the value of the asset. These changes can be both in the direction of growth, and the fall in value. And these expectations are fueled in turn by rumors, in the role of which any information or its interpretation can act – news, analytics, statements of officials, economic data, etc. At some point, the event expected in the future will already be “fully included in the prices” and investors will only have to fix the profit or “sell the fact”.

This rule is so widely used in the financial markets that I dedicated a separate article with real examples to it, which you can read on the link – “Buy the rumor, sell the fact – how it works on Forex“.

And for those who finished reading the article to the end – an anecdote as a gift.

“The correspondent asks the director of the madhouse what test is the criterion for discharge. Director: – We pour a full bath of water, we put a teaspoon and a large mug next to it and suggest to release the bath from the water. The correspondent smiles and says: – Well, any normal person will take a mug. No, says the director, a normal person will pull the cork.”

Think not standard. But remember the rules.

What rules of Forex trading do you consider to be the most important? Write your opinion or comment.

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