5 Forex Trading Techniques for a Newbie Which Are Often Overlooked
Forex trading, like any other kind of financial activity, involves a significant risk of invested capital loss. There are particular set of rules for avoiding or keeping this loss to a minimum, and extending one‘s gains at the same time. They might seem very simple and dull, but keeping to them could save someone‘s capital or even help to avoid bankruptcy.
They are very often disregarded by young and inexperienced traders, as long as they still have capital to invest. They even have been ignored by me, until I had nothing to invest. Those forex warnings can change your trading and profitability drastically. You may have already come across some of them, but as they say: “repetitium est matter studiorum” (repetition is the mother of study).
Let’s look at the most important and basic trading techniques.
1. My advice is to take from 1 to 2% risk of the invested capital per trade. If you are taking more than one trade for one currency pair, the risk could be even smaller. No matter how efficient and perfect your trading system is, reducing the risk to as little as possible is crucial for continuous trading. It is of utmost importance, especially when you are a day trader, making 4 – 10 trades per day. Read more about 10 rules of forex money management.
Depending upon your strategy effectiveness and profitability, numerous wrong trades happening from time to time, have to be tolerated emotionally and financially.
2. The next thing is to trade according to your plan. Never enter the market just because you “feel like it.” Feelings will not help when the currency pair movement moves against you; what helps is a pure mathematical calculation and chosen indicators signaling possible trade entry or exit.
If you have just started trading, my advice would be taking some practice on a demo account for some time until you come up with a decent, time tested, profitable forex trading strategy. If it works on the demo account, you can use it in a real account, only keep to your trading methods and stay away from decisions based on emotions.
3. Reducing the losses and extending the profits is another important, yet hard to accomplish rule. You have to be patient, planning your targets in advance and controlling your emotions. It’s always tempting to take the quick buck when the market is moving in the right direction and hesitate when your losses accumulate against you. The best option here is always plan where you will enter and exit the trade.
If the market takes your money – make it the smallest portion possible. Even if your stop loss was triggered and the price went back – you cannot predict everything, so forget it and look for another opportunity. The final purpose is to have a bigger plus after a sum of trades.
4. Using technical trading strategy only when there is no important news coming up. The best negative example is trading on Friday, just before or during the FOMC or Non Farm Payrolls news release. Technical trading strategy must be strictly applied only when the market is calm and there is no economic or political news that would create significant price moves, breaking all the technical patterns. Want to see all news headlines on the chart? Download FX Pulse free tool here.
The best results, by using a technical approach, are achieved trading from Tuesdays to Thursdays. Fridays and Mondays are less predictable, because on Mondays, the market is mostly indecisive and on Fridays too volatile and choppy. Learn more how to differ trend market from ranging market.
5. Revenging the market is another common mistake made by, presumably, every forex trader. There was a time when I thought the whole world (along with forex market) turned against me. My super-duper strategy was not working anymore (just a few days) and in disbelief, I tried the same methods entering the forex market with bigger leverage. I just wanted to “get my money back” those “bastards” from banks and corporations took from me.
The only wise decision you have to make during harsh trading time is to stop trading and stay away from the computer. You might have to cool off and quietly analyze your mistakes the next day. After a few days, your mind will be clear from any revenge thoughts and then you could start trading again.
Tomas Greiciunas is an active trader and blogger who shares forex market commentaries, insights and free signals in his forex signals 24 blog.