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The moment a forex trader is enjoying his winning streaks, it's important to watch out for any possible setbacks. Just a single bad loss can make the trader give back all his profits and forex trading capital to the market. Reason trumps impulse since a logically focused trader certainly knows how to restrict his losses. Impulsive trading is pretty dangerous since you're definitely swimming towards bankruptcy.
When You Trade, You Should Never Risk More than 2 Percent of Your Capital
This is the most familiar and most desecrated rule in forex trading. Many trading books contain stories of forex traders losing 1, 2 or even 5 years' worth of earnings in a single trade that has gone terribly wrong. When you set a two percent stop-loss for every trade, then this would mean that you'll have to sustain ten consecutive losing trades before you'll lose 20% of your trading account.
Use Both Fundamental and Technical Analyses
These methods are significant since they have a great effect when it comes to determining the movement of prices. Fundamental things are good when it comes to dictating extensive themes in the market which can last for days, weeks, months or years. Additionally, technical things can quickly change and are valuable for identifying specified entry and exit levels. For instance, if the market is essentially a dollar-positive environment, then you should technically search for opportunities to purchase on dips rather than to sell on rallies.
Constantly Pair Strong with Weak
The moment a physically powerful army is positioned next to a weak one, the odds are heavily skewed for the stronger army to win the game. You should approach trading in the same manner. When you trade different currencies, you should always deal in pairs. Each trade consists of purchasing one currency and exchanging another. Weakness and strength can last for a certain period as different economic trends evolve. Pair the weak with the strong currency so you can gain profits in the currency market.
Right Timing and Right Analysis
In foreign exchange, successful directional trades mean having the right analysis as well as the right timing. Whenever the price action moves directly against you, trust your eyes and instincts. This is the right time for you to take a modest stop. In this field, being early and being right is paramount. Consider an instance where traders anticipate a turnaround, but to no avail. The rally persists longer than expected, so the traders exit early and take a small amount of loss. Later, however, they found out that the rally did turn around and they could have earned a greater amount of profit.
There are risks involved in forex trading, but once you've mastered everything, you'll surely devote your entire time in this money-making activity.
Author: Zahir from www.admiralmarkets.com.au
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