3 “Golden Rules” of Forex Trading
12/12/2011 12:01 am EST
I have had a number of e-mails sent to me asking me to detail my three new "golden" trading rules. As promised, this week I will share these with you, but first, we should quickly recap why I believe that in the vast majority of cases, approaching your trading as simply as possible is typically the most effective and pain-free route to success for us all.
Like a broken record, I often find myself repeating the same lessons, guidance, and principles to my students, both those new to the markets and those with a little more experience. We all have to accept that if we want to make trading a consistently profitable endeavor, then we need to first recognize that it is basically a game of odds and probabilities.
It still amazes me just how many people in the markets still think that there is some indicator or system out in the vast plethora of trading methodologies that is better or more effective than the rest of the tools available to us already. The toughest part of the trading journey is coming around to realizing that the only working part which can truly make a difference in attaining speculative success or failure is really the result of the individual traders' pre-defined rules.
In a business where anything can happen at any given time (as we have seen across all asset classes recently), it is vital for us to acknowledge that our own behavior and actions are the true catalyst which drive our results, not the behavior of the market, for the market is simply too great a force for anyone to control.
Defining your rules effectively defines your behavior, which in turn dictates your actions. Your actions are then what lead to your final results. So, what are the "golden" rules that I choose to trade by? They may be more basic than you think:
Rule #1: Learn to Take a Stop-out
As rudimentary as this first rule may seem, it is surprising how many times it often takes a novice and even sometimes a seasoned trader to realize that at no cost should this rule ever be broken. Once you have found the trade, marked off the entry and target, and placed the stop-loss order, it should be set in stone.
There was a phrase taught to me early on in my trading education which stated that my losses would always be far more important to me than my wins, and I have digested and lived by that rule ever since.
I will always be the first to admit that taking a stop-out is difficult in the early days, mainly due to the feeling of being wrong. Combine that with the fact that you just lost a little bit of your money as well and it can be a bitter pill to swallow.
However, we soon come to realize that losing small is a vital part of the game. If you don't have small losses, you can never have larger wins. Sure, sometimes you will take a stop-out only to watch the trade go your way, but you also have to ask yourself the question, "What if it had continued to go against me and I wasn't protected?"
How long do you think the accounts lasted of those people out there who bought previous lows of, say, the USD/CHF and didn't protect themselves? Many people bought those lows, but only the professional traders who got out when they were wrong are still around right now.
Take the stop on the chin and move on. Things won't always go your way in the markets, just as they won't always go your way in real life either.
NEXT: Rule #2: Learn to Take a Profit
|pagebreak| Okay, as I am writing this sentence right now, I can see people rolling their eyes at this rule, but hold on for a bit, because there is a point I am making. As obvious as it may seem-because let's face it, people only trade to make profits-hitting a trading target and closing the trade can be one of the single most challenging tasks a market speculator can face.
We always hear about the emotions of fear and greed driving the markets, and never is this more true than when an individual is in a good, strong trade and then sees it fall all the way back for a breakeven or small loss.
Sometimes this will happen, and I have personally had numerous trades fall short of their targets. As frustrating as this can be at times, I have also had plenty of trades that have hit their target perfectly and closed out for a great profit. All we can do is stick to our plan of action and not let our feelings get in the way.
See video: Don't Let Emotions Get the Best of You
The key aspect of this rule is really to get into the habit of placing the target order in the system based on your objective analysis before you take the trade, and if it hits the target, then be happy for the result.
So many times, I have seen students get greedy and keep extending their targets well beyond their original only to witness a violent reversal and leave big profits on the table. Remember that we are trying to achieve consistency in our trading, and over time, if you have been thorough in your plans, then you will have detailed performance stats to work with and amend your rules in the future.
Rule #3: Learn to Take the Trade
That's correct, you need to learn to take all of the trades that meet your plan! Essentially, this could be one of the most overlooked aspects of consistently successful trading I have ever come across.
Most new traders make the mistake of attempting to look at too many markets and then try to cherry-pick the best trades across the bunch. There is absolutely nothing wrong with looking for trades with the best probabilities going for them, but we also have to be very cautious about missing out on trades that meet the plan and are not taken. Typically, when you attempt to cherry-pick, you end up picking the losers and not taking the winners!
A simple solution for this outcome is to just divide your maximum risk across the board and get involved with all the markets you are looking at, or to simply look at fewer markets.
See video: Make One Market Your Specialty
We can also have issues when faced with a losing streak in our trading. The
very worst thing a trader can do is pass on a trade that matches their trade
plan because they fear another loss. This can often result in passing on a
quality set-up that could have greatly turned the overall profit and loss
situation around and impacted their final results and consistency.
The idea is simple: If a trade comes up which meets the criteria for the plan, then it must be taken; no questions asked. Remember that you have to be in it to win it. Passing on a trade opportunity due to emotional setbacks is not objective practice.
These rules may be basic in nature, but they can be powerful and effective in action. Let your rules be both easy to understand and simple to master and the rest will come with a little time and patience. I hope this helps your journey go a little bit smoother.