Forex Trading -- Rules of Thumb

In this section we will be covering the few important rules that should never be broken in trading. If you can apply these rules consistently, and with the right amount of discipline, you will be well on the way to being a profitable trader.

The following are rules that can significantly improve your chances of success if they are understood, practiced, and implemented consistently in your trading. These rules have been learned the hard way, mostly through trial-and-error, and the inevitable mistakes that everyone makes when they start a trading business.

Set up and implement specific goals and objectives

Few things are more important to your trading success than having set specific goals and objectives for what you are trying to achieve. It is amazing to me how often we hit our targets, meet our objectives, and reach our goals best when we speak aloud and write them down.

For any business to be successful it must have measurable objectives that you are actually able to achievable. In trading, the primary objective is obviously to make money, but it is important to have other objectives that are not strictly cash-related.

We must always remember that reward and risk go hand-in-hand in trading and that we can’t expect to achieve high returns without planning and bracing for high risk (draw-downs).

Your objectives and goals have to be very specific to you, but they must also include the following characteristics if they are going to be useful:

• Be measurable in accordance to completion and timeframe involved
• Be realistic and achievable
• Be worth the time and effort involved
• Be positive

As an example, here are some actual objectives (Please bear in mind that this is only a partial list):

• Create 2 new positive-expectancy trading systems each and every year
• Seek to make less errors implementing your trading systems each year
• Work to achieve a return to maximum draw-down ratio of 1.5:1
• Take 2 weeks vacation from trading during each year

You should also note that only one of them is meant to be about making money, and that has a measurable objective that is very similar to a draw-down, and it is not guaranteed. If you know what you are trying to gain in your trading, and when you are trying to achieve it, the whole of your efforts will be more focused on meeting your objectives.

This also helps to guide you to only pay attention to things you really want to achieve with your time and resources that you have available. This will also give you a way that you can effectively measure the success and progress of your trading strategy.

Generally traders who have well-defined objectives will be much more successful than those that do not have pre-defined goals.

Be consistent and disciplined

In order for you to be able to realize the full potential of your trading systems it is very important that you take every trading entry, adjust every stop, and close out every trade when your pre-defined trading system says you should.

This takes an extreme amount of confidence in your trading systems, good and reliable technology, and the unwavering discipline to stick to your trading plan no matter what happens.

The good thing about have an underlying assumption about being consistent and disciplined is that you have a pre-defined plan for every situation that you may face in your trading, so that you know how you are defining what being consistent really means. Your plan needs to include at least the following items in it if it is going to be successful:

• All of your trading rules for entering, adding to, and getting out of your positions

• What you are planning to do if your trading computer, internet connection, broker, power, telephone etc. fails to be of any real use or break down

• What you will do if for some reason you are unable to trade

• What you will do if you lose a certain percentage of your account

• What you will do if all the markets are closed and you can’t get out of your current positions

Unless you write down the answers to all these scenarios, you cannot be properly consistent and disciplined in your approach to trading and if you lose money you will not know if it is because you didn’t follow your plan, your plan is incomplete, your systems do not work, or if it is because you are simply going through a losing period.

Let your profits run

This rule is undoubtedly the key to being a successful trader. It is in these three simple words however that are easier said than done. When we get a profitable trade going it is our natural fear of losing the unrealized cash starts and we truly want to close it out now and quit while we are ahead.

Most trading actually consists of long periods of small winners and losers, that is quickly followed by a few huge winners that make the difference between overall profitability and simply breaking even or even losing thanks to the trading costs(commissions, spread, and slippage).

It is our ability to let the huge winners become huge. This is what determines how we will perform overall during the course of the year. The key here is in letting a winning streak run is to have trailing stops that are generally outside the daily noise of the market so that they are not so tight as to get stopped out during ‘normal’ trading process.

This means that you need to be prepared to give up a relatively large portion of a winning trade’s open profit and it is also the thing that makes this so hard to implement. In fact, we should be adding to a winner and widening stops rather than trying to figure out how tight
our stops can be to capture the largest amount of profit.

The trade has already shown you if it intends to be a winner, and the chances are it is a low-risk idea if you were to add to the position now rather than ‘strangle it’ with stops that are too tight.

It is very important that your management rules leave room for large winning trades, and that the rules are pre-defined and understood before you place the trade in the first place. This will allow you to stick to your rules when you do get the big winner.