10 Forex Trading Essentials
These 10 Forex trading essentials are a high-level peek at the pitfalls that
catch many traders. Compare your trading style with these simple fixes and if
you are not employing some or all of them, you are placing yourself at a higher
risk level.
1) Increase your time perspective - If you are not a well seasoned Forex trader,
you shouldn't even look at a price chart of less than 60 minutes. The randomness
of the normal transactions which occur in Forex will distort your judgment of
the true picture. Use longer time frames, such as 60 minute, 4 hour and daily
charts when planning your trades.
2) Reduce your position size to 5% Maximum - Having more than 3 to 5 percent of
your trading capital on the table is a major no no. High leverage makes it very
easy to get in away over your head. This combination snares many traders and can
rapidly destroy your account. You need to have the ability to ride the
volatility waves common in Forex.
3) Give your trade time to work - You can only use this option effectively if
your position is sized safely... as per 2) above. Prices will fluctuate
dramatically in Forex, and you need to be sure that a loss really is a loss
before you close a trade that is moving against your plan. A 30 pip stop loss
will often kick you out of a trade, just as it's about to turn in your
direction. You need to allow for larger price swings... if you have determined
the major price trend, be patient and let the odds work in your favor.
4) Reduce your dependence on technical indicators - Due to the fact that
technical indicators get their data from past events, the reality is they have
no ability to predict the future. Pro's that enjoy success using these
indicators, often profit from the knowledge of how the masses are likely to
react to this data, rather than the information itself. You need to determine
the major trend (a simple moving average will show you this) and hop aboard. Use
a longer time frame, as in 1). The largest players in Forex rely about 25% on
technical indicators when making their trading decisions.
5) Trade only one or two currency pairs - And stick to the majors... not the
crosses. Currency prices are driven primarily by fundamental data. In order to
anticipate what is likely coming down the road, you need to follow some basic
data for each of the countries involved. Trading too many currencies will make
it difficult to keep up to date. There is equal opportunity to profit from each
of the pairs, so wait until your experience level has matured and the
information tends to sink in without as much effort on your part before you
start to trade more currencies.
6) Average in and out of your trades - If your trading account is less than
$50,000 have your broker enable mini-lots for your account. This will allow you
to average in and out of your trades... a great way to add more flexibility to
your account. If this applies to you and your broker doesn't offer mini lots,
find a new broker... this is an important need to do.
7) Follow the data for your currency pair(s) - Know what data is pending for
release. Volatility often increases dramatically when these releases occur. The
safe strategy is to exit your positions prior to major releases... this is the
way many of the larger accounts handle these situations. Data releases can often
cause a change to the trend. Take them seriously.
8) Determine the trend and get aboard - As with any type of trading, the safest
bet is to determine which way prices are trending, and then trade in that
direction. You don't need anything fancy... a simple moving average on your
candlestick chart is sufficient. Zoom your chart out to be sure you have the big
picture. Compare where the price is now, relative to where is has been for a
significant amount of time (at least a month). Use caution if the current price
is near upper or lower extremes, as there may be a trend change once that
extreme is reached.
9) Know when to take a profit - A winning position can quickly turn into a loser
if you set your sights too high. Don't be afraid to take your profit - or a part
of your profit at 20 or 30 pips. The price waves in Forex make it ideally suited
to averaging into and out of positions by using multiple entry and exit points
for each position. This is exactly where your mini lots can help! The benefit of
spreading out your position is that your overall risk is reduced.
10) Stop listening to "Gurus" - Don't fall into the trap of believing
everything, or even most things, you hear. The trading world is overflowing with
gurus only too willing to offer their opinion on the future. It will only be an
opinion, nothing more. They may seem to have convincing data, but trust your own
brain. You need to weigh the economic data from your countries... that is what
drives currency prices. The enormous size and nature of Forex ensure there is no
insider information. You have access to the same data as everyone else in the
game. In time, your own instinct will guide you to your goals, and that is what
you need to trust.
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