The more you understand the forex markets, the longer you will survive as a forex trader. Sometimes forex trading can feel like being in a war zone. I've come up with 10 forex commandments to help you stay the course.
1. Don't start with just the minimum deposit required to open an account
Many forex brokers have a low minimum deposit required to open an account. The low amount of the deposit will usually cause you to open extremely large account positions in relation to your opening balance. This is a recipe for disaster. The goal of the typical forex broker is to get as many accounts opened as possible. They tend to set the bar really low on the opening deposits to meet their recruiting goals. Just because they tell you that you can control a trade of $10,000 on the market using only $50 in your $300 account doesn't mean that it's smart. Start out with a larger deposit, make smaller trades and you will have a much better chance of surviving.
2. Don't Buy Forex Software Without Researching it's Performance
Don't ever just run out and purchase automated forex trading software based on a high pressure sales page. Software that is truly valuable to forex traders will sell itself due to word of mouth. It will not need a high pressure sales page full of outrageous claims. Some forex software is useful and the key to finding it is looking for independent forex reviews. This type of automated software is not to be mixed up with forex practice software.
3. Learn to Use Stoplosses
Stoplosses should be a requirement for forex trading. Learn how to use stoplosses effectively. You might think that you don't need stop losses because you understand the market, but no one is perfect. Stoplosses will protect you from having unlimited downside to your trades and allow you to move on to the next opportunity.
4. Keep a Trading Log
A trading log provides insights to your trading decisions after the fact. It might seem like a hassle, but it will provide insights to your trading patterns that you might not be aware of. Using a trading log will help you remember why you made your trades in the first place and that will help you learn the difference between how you planned a successful trade and how you planned a failed trade.
5. Develop A Trading Plan
Trading without a plan can lead to disaster. A trading plan can help you to keep your head together in the heat of the moment. Winning with forex trading is about the sum of your actions, not just making one large winning trade.
6. Don't Trade Too Large for Your Account Size
Trading too large for your account size can kill it fast. Placing large trades with a small account balance will cause large fluctuations in your account balance and that will make you nervous. It will make you happy when you're winning, but when you're losing you won't be able to think straight about trading. Always be adequately capitalized for the trades you place on the market.
7. Never Try to Pick Tops or Bottoms
It is so tempting to try to choose the point where you think a currency pair will turn around and go the other direction. If you manage to find any success at this, it's a great boost for your trading ego. However, more often than not, you will be wrong about the turning point of a currency pair and you will most likely keep trying to pick that top or bottom to prove yourself. This will only reduce your account balance over time. Stick with trading the trends.
8. Don't Add to Losing Positions
As a general rule of thumb, never add to your losing positions. Adding to losing positions only increases your rate of loss as the market moves against you. Your risk will continue to get bigger and bigger until you either wipe out your account or get nervous and close the trades for a large loss.
9. Don't Over trade
Sometimes there isn't much "tradeable action" and you will feel the urge to trade anyway. Avoid this by finding something else to to. Forex trading does not require watching the markets all the time to catch opportunities. You won't be able to catch every opportunity anyway. Don't trade just for the sake of trading.
10. Keep Your Eye on the Bigger Picture
No matter what time frame you are trading on, it's good to know what is happening on the daily charts. Understanding the larger trends in the markets will allow you to be more decisive about your trades in the lower time frames and will help you maintain a more clear perspective. Trading with the overall trends will increase your odds for success