1. Forex Trading Rules: Introduction
  2. Forex Trading Rules: Never Let a Winner Turn Into a Loser
  3. Forex Trading Rules: Logic Wins; Impulse Kills
  4. Forex Trading Rules: Never Risk More Than 2% Per Trade
  5. Forex Trading Rules: Trigger Fundamentally, Enter and Exit Technically
  6. Forex Trading Rules: Always Pair Strong With Weak
  7. Forex Trading Rules: Being Right but Being Early Simply Means That You Are Wrong
  8. Forex Trading Rules: Know the Difference Between Scaling In and Adding to a Loser
  9. Forex Trading Rules: What Is Mathematically Optimal Is Psychologically Impossible
  10. Forex Trading Rules: Risk Can Be Predetermined; Reward Is Unpredictable
  11. Forex Trading Rules: No Excuses, Ever

by Boris Schlossberg and Kathy Lien

If there is one inviolable rule in trading, it must be "stick to your stops". Before entering every trade, you must know your pain threshold. This is the best way to make sure that your losses are controlled and that you do not become too emotional with your trading.

Trading is hard; there are more unsuccessful traders than there are successful ones. But more often than not, traders fail not because their ideas are wrong, but because they became too emotional in the process. This failure stems from the fact that they closed out their trades too early, or they let their losses run too extensively. Risk MUST be predetermined. The most rational time to consider risk is before you place the trade - when your mind is unclouded and your decisions are unbiased by price action. On the other hand, if you have a trade on, you want to stick it out until it becomes a winner, but unfortunately that does not always happen. You need to figure out what the worst-case scenario is for the trade, and place your stop based on a monetary or technical level. Once again, we stress that risk MUST be predetermined before you enter into the trade and you MUST stick to its parameters. Do not let your emotions force you to change your stop prematurely. (To learn more on why you need a plan, see The Importance Of A Profit/Loss Plan.)

The Risk
Every trade, no matter how certain you are of its outcome, is simply an educated guess. Nothing is certain in trading. There are too many external factors that can shift the movement in a currency. Sometimes fundamentals can shift the trading environment, and other times you simply have unaccountable factors, such as option barriers, the daily exchange rate fixing, central bank buying etc. Make sure you are prepared for these uncertainties by setting your stop early on.

The Reward
Reward, on the other hand, is unknown. When a currency moves, the move can be huge or small. Money management becomes extremely important in this case. Referencing our rule of "never let a winner turn into a loser", we advocate trading multiple lots. This can be done on a more manageable basis using mini-accounts. This way, you can lock in gains on the first lot and move your stop to breakeven on the second lot - making sure that you are only playing with the house's money - and ride the rest of the move using the second lot.

Make the Trend Your Friend
The FX market is a trending market. Trends can last for days, weeks or even months. This is a primary reason why most black boxes in the FX market focus exclusively on trends. They believe that any trend moves they catch can offset any whipsaw losses made in range-trading markets. Although we believe that range trading can also yield good profits, we recognize the reason why most large money is focused on looking for trends. Therefore, if we are in a range-bound market, we bank our gain using the first lot and get stopped out at breakeven on the second, still yielding profits. However, if a trend does emerge, we keep holding the second lot into what could potentially become a big winner. (To learn more, check out Trading Trend Or Range?.)

Half of trading is about strategy, the other half is undoubtedly about money management. Even if you have losing trades, you need to understand them and learn from your mistakes. No strategy is foolproof and works 100% of the time. However, if the failure is in line with a strategy that has worked more often than it has failed for you in the past, then accept that loss and move on. The key is to make your overall trading approach meaningful but to make any individual trade meaningless. Once you have mastered this skill, your emotions should not get the best of you, regardless of whether you are trading $1,000 or $100,000. Remember: In trading, winning is frequently a question of luck, but losing is always a matter of skill.

Forex Trading Rules: No Excuses, Ever

Related Articles
  1. Trading

    10 Steps To Building A Winning Trading Plan

    It's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself.
  2. Trading

    Top 10 Forex Trading Rules

    Get some guidelines on how to survive - and thrive - in a variety of markets.
  3. Trading

    Understanding Forex Risk Management

    There's risk in every trade you take, but as long as you can measure risk, you can manage it.
  4. Trading

    9 Tricks of the Successful Forex Trader

    These steps will make you a more disciplined, smarter and, ultimately, wealthier trader.
  5. Investing

    Top 8 House-Hunting Mistakes

    These common mistakes occur when you allow your emotions to take over.
  6. Trading

    5 Things to "Deliberately" Do to Improve Your Trading

    Most traders are putting in trading hours, but not improving. Here are deliberate steps that can take your trading to the next level.
  7. Retirement

    Surviving Your First Year As A Trader

    These tips will reduce the learning curve for first-year traders.
Frequently Asked Questions
  1. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  2. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  3. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
  4. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ...
Trading Center