14 Rules of Successful Forex Trading

[forexclown]

not sure what i think of these rules but they are something to think about

Being a successful Forex trader takes more then just having money, time and desire. The more you realize it, the better are your chances of making it big in this wonderful business. Throughout the years I learned many valuable lessons that today I apply to my Forex trading. Here are some of these lessons. I hope you don’t take them lightly, I guarantee you that these are true gems product of trial and error (something I hope to shorten for you!).

1.Your psychological state of mind is more important than your dollars. Yes, that is correct. For example, entering a trade when you know you should not enter it and ultimately losing money on it will cause you a financial loss which hurts but can be recovered in the next trade or two. However, it will also cause you a psychological loss in the form of future fear and insecurity. This, will take more than one or two trades to recover!

2.This one is simple but you would not believe how many traders do not follow it. In bear markets sell the markets that show most weakness. Don’t try to outsmart the market. If the market is telling you "I am weak" don’t argue and just follow! If the market tells you "I am strong", BUY and continue BUYING!

3.Don't ever try to pick absolute tops and bottoms. I know of traders that have an addiction with this. They always look to pick the absolute bottom or top and ride the market on the reversal. They succeed one or twice but eventually suffer a big hit. If you can't help it and you want to try and look for those huge turning points in the market at least use some sort of confirmation. Don't just guess "this is the top" or "this is the bottom".

4.Trading runs in cycles. There are good day and bad days, there are good weeks and bad weeks, there are good months and bad months. Don’t let a bad day, week, or month put you down. Learn not to measure results in the very short term. Many traders give up after having three or four bad days. Don’t! Know that its part of the business. Hang in there, manage your money well, be persistent and I promise you it will pay off!

5.Remember what type of trader you are and follow the rules of that specific method of trading. For example, if you are a day trader it would be wise to ignore the fundamental picture. It would also be wise to analyze and trade with the appropriate time frames. Also, select a broker that offers tight spreads, provides good order fills and guaranteed stop losses (all important for effective day trading). If you are a swing trader it is important you look at the much bigger picture. Sometimes fundamental market data can come in handy (although I personally prefer to look at the technical picture alone). Learn to be patient, both in terms of your profit target being reached and entering trades (for swing traders it can be weeks with no trade signals).

6.KEEP IT SIMPLE! Don't think that the more indicators and patterns you use the more profitable you will be. My trading strategies are simple BUT original. I learned through time that the true gems in the market originate from simplicity. This is an important concept, don’t dismiss it.

7.Never ever add to a losing position. I think this is one of the biggest "diseases" traders have. A stop loss is like a red light, it's not a suggestion. It tells you to get out of the market not to add more money to the trade. It simply makes me angry to see people adding money to a losing position. It has no justification except one. HOPE! They don’t say "gee, I was wrong and should have exited in my stop loss level", they say "I am correct about the direction of the market, it's just that my stop loss was placed to close to my entry. If I hang in there and add more money the trade will surely go my way and I will not only make for the loss but I will make much more since now I am adding to my position at a much better price!".

8.Be patient with your profit targets. I know it is very tempting to grab the profits in a winning position before the profit objective is reached. There is a fear the market will turn around and the trade will become a loser. Be disciplined. There is a reason your profit objective is where it is. You did your homework before entering the trade and the profit objective you decided on justifies the trade in terms of risk/reward. Frequently take profits before the profit objectives are reached will destroy your whole risk/reward ratio and will finally be the difference between success and failure.

9.95% of traders are not disciplined and that is why they do not succeed. They always know better than their system, they always know better then what the market is telling them. Be amongst the 5% disciplined traders and I guarantee you will be light years ahead of the crowd.

10.Think, analyze, and create BEFORE the trade. During the trade only follow what you though, analyzed and created before the trade. Before you enter the trade you are cool and balanced, you are thinking logically. During the trade you are under fire since money is involved. You are under pressure. What makes you think that you can make better decisions under intense fire then when you are calm and balanced? You can't. That is why you planned the trade before hand. Follow your plan!

11.Don’t favor sides. Trading is about recognizing long and short opportunities. Many people have the problem of shorting. They have the problem of profiting when the market is going down. They are taught through life that you make money when markets go up. As a currency trader you don't care if the currency market is going up or down, if there is an opportunity to make money you take it, that’s your job.

12.Trade a method that fits your personality. If you are like me and like hearing the cash register ring often then use day trading strategies. If you don’t mind waiting for profits to accumulate over time then consider using swing trading strategies. This is very important. Trade with what best suits your character. Be true with yourself and recognize what are your needs. My need is the gratification that frequent profits provide, no matter how small. It keeps me going.

13.As forex traders we can never know what price is to "low" and what price is to "high". Don’t be afraid to join a trend. I know that psychologically this can be difficult sometimes. You are always afraid that you will be entering the trend at it's end. This rule is important but must not be followed blindly but rather smartly. Suppose you are day trading the EUR/USD. You know that the average daily range of the pair is 90 or 100 pips. If your system is telling you to go long at a point where the market has already moved 80 pips and place a profit objective of 50 pips, would that be a smart move? Obviously not.

14.Know the personality of the currency you are trading. Each currency pair has its own individual "personality". This can be in terms of volatility, spread, average daily range, liquidity, specific patterns etc. Use trading strategies that go hand in hand with the characteristics of the currency pair.

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[DrForex]

Interesting post. However I have a few comments.

The post represents a example of a whole strain of market wisdom that seems to be at the root of the problems most losing traders (and according to this wisdom they are 90%+) have.

I chose a few of the topics and comment on them:

Originally Posted by forexclown

4.Trading runs in cycles. There are good day and bad days, there are good weeks and bad weeks, there are good months and bad months. Don’t let a bad day, week, or month put you down. Learn not to measure results in the very short term. Many traders give up after having three or four bad days. Don’t! Know that its part of the business. Hang in there, manage your money well, be persistent and I promise you it will pay off!

This is an very important point. You can't make long term conclusions from short term data. A 15 minute price move UP isn't an indicator of a beginning Up trend of 5 months. Back testing a system for a few months or years means ZIP. Running a two week trial on a tip service to see "if it works" neither. A 5 days / 5 weeks equity trend in your account isn't an indicator of where you are headed long term.

Originally Posted by forexclown

9.95% of traders are not disciplined and that is why they do not succeed. They always know better than their system, they always know better then what the market is telling them. Be amongst the 5% disciplined traders and I guarantee you will be light years ahead of the crowd.

Here I beg to differ big time. I am not saying they are disciplined. I say they lose because they are following a losing game plan. I have a wealth of evidence to back this up. It is not totally novices with no regard whatsoever for trading and trading principles (like these) that lose.

It is traders that all follow the same basic structure that lose. Training providers touting this structure has a problem to explain why they can't really change the statistics and resort to this kind of "you aren't disciplined" reasoning / rationalization.

While it is totally true that every trader trade his own account and cannot point a finger at a mentor, coach, course vendor or whatever, you can rest assured that if a vast majority (think normal distribution) follow the same structure / strategy and rules (like these) and a vast % of those fails, then the problem might be the structure.

Below are examples of the problems in the current popular trading structure that most follow and as our thread originator said, 95% fails:

Originally Posted by forexclown

6.KEEP IT SIMPLE! Don't think that the more indicators and patterns you use the more profitable you will be. My trading strategies are simple BUT original. I learned through time that the true gems in the market originate from simplicity. This is an important concept, don’t dismiss it.

The problem here isn't keep it simple. By all means, keep it simple, whatever that means. The problem is the untenable idea that the forex market for a short and very short term trader contains "true gems". As if you will by some usually exotically named technical analysis system stumble upon the Google of the forex market.

This whole idea of finding "great trades" that harks back to stock market guru books is a fallacy in the forex market. It is a fundamental flaw. Even more fundamental than excluding a proper understanding of fundamentals from your forex market analysis.

Originally Posted by forexclown

7.Never ever add to a losing position. I think this is one of the biggest "diseases" traders have. A stop loss is like a red light, it's not a suggestion. It tells you to get out of the market not to add more money to the trade. It simply makes me angry to see people adding money to a losing position. It has no justification except one. HOPE! They don’t say "gee, I was wrong and should have exited in my stop loss level", they say "I am correct about the direction of the market, it's just that my stop loss was placed to close to my entry. If I hang in there and add more money the trade will surely go my way and I will not only make for the loss but I will make much more since now I am adding to my position at a much better price!".

Again the total structure of how the losers trade is wrong. If you trade like that you shouldn't add to a losing position, for sure. BUT, you can't isolate this or that symptom that is part of a holistic flawed structure, try to fix this or that and think you have a solution and a working structure. I have an army of traders, of which by far the majority does not fail (the reasons may be varied and "fail" may have many different definitions) who will say exactly the opposite: Add to losing positions. Don't use stops. Average your losing positions.

In addition to this I have a sample of statistical evidence gathered by roughly 200 traders which shows that it is a good thing in the forex market to add to your positions at a much better price and not to close a trade too quickly for a loss (turning a latent profit into a definite loss).

Originally Posted by forexclown

8.Be patient with your profit targets. I know it is very tempting to grab the profits in a winning position before the profit objective is reached. There is a fear the market will turn around and the trade will become a loser. Be disciplined. There is a reason your profit objective is where it is. You did your homework before entering the trade and the profit objective you decided on justifies the trade in terms of risk/reward. Frequently take profits before the profit objectives are reached will destroy your whole risk/reward ratio and will finally be the difference between success and failure.

I say the exact opposite. Take your profits quickly. The fact that there are standard 24 hour ranges and lots of variance up and down also means there is an optimal profit target. Most often it won't convert into a large profit, therefore take it. As one of my clients said. "The only running my profits do is running away." Tomorrow is another day. Take a small profit again. Do it a few days in a row and soon you'll have a big profit. This goes back to the first topic above, "the gems". That is an illusion, thus the big profits is an illusion.

I can't allow this risk / reward ratio reference to go by unchallenged. Most losing traders I meet apply a scientifically correct risk / reward ratio bla bla bla. (I.e some mathematical attempt to express the cut your losses run your profits concept.) Let me say that again. Most losers I know, who came onto my programme and shared his trading approach before BWILC with me, used it. I throw it out of the window and lo and behold, suddenly they make profits. Why is that?

Bottom line is that it is possible to trade completely different and make money than what is generally touted as "the way to trade". I think most of the 5% successful ones don't trade successfully the way the losers trade unsuccessfully. They trade totally differently. At least my clients don't and the % successful ones are way way more than 5%.

Originally Posted by forexclown

11.Don’t favor sides. Trading is about recognizing long and short opportunities. Many people have the problem of shorting. They have the problem of profiting when the market is going down. They are taught through life that you make money when markets go up. As a currency trader you don't care if the currency market is going up or down, if there is an opportunity to make money you take it, that’s your job.

Now here I am sorry to say, we are entering the realms of extremely bad advice.

FAVOUR SIDES. Decide if you want to make money when this market goes UP or DOWN and when it does that, make money. Simple as that.

Originally Posted by forexclown

14.Know the personality of the currency you are trading. Each currency pair has its own individual "personality". This can be in terms of volatility, spread, average daily range, liquidity, specific patterns etc. Use trading strategies that go hand in hand with the characteristics of the currency pair.

I agree totally. Focus. Trade one currency pair. The currency market is not like the stock market where you have virtually independent instruments. (This is one of the reasons why that whole "finding the gems" story doesn't work.) You can look at it from every possible angle you can find, if you don't trade the exotics you trade the US dollar.

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[muraleedharan]

Hi
This is very interesting and informative reading which can come only from an experienced trader.I would like to write something about John Pipers "Pyramid" in this context.You have to evolve from the stage of the aspiring trader individual to an expert trader. Which requires time and experience.The components of the trading pyramid ie You,commitment,discipline,Money management, Risk Control,The three simple rules(Cut your lossess,Run your profits,Trade selectivity),System parametres, Your Systeme ie methodology, Operating your system in the markets, and end of the day the profits or losses accumulated are blended harmoniously to develop the personality of the trader.This is a process a person has to undergo before he becomes a trader. Once you have become an expert trader, you simply are and you don't trade for money.Money is simply a by product of trading.Easily said. The Journey is tough and challenging.But a person with passion and commitment can make it.And the reward is really wonderful.
Muraleedharn, Bangalore,India

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[Fred Smilek]

The first 4 points mentioned are crucial. Especial point 4 about Trades running in cycles. [Quote Point 4]This is true. Keeping this in mind can help you successfully analyze your next trading opportunity.

Stay Disciplined and Focused,
-Fred Smilek