4 Important Currency Trading Tips Every Forex Trader Should Apply

Includes: ERO
by: Tomas Greiciunas

Forex alerts and warnings defined below can also be used in a stock market, due to the nature of investment principles, which are the same, be it for stocks, gold or currency units. If you are a stock trader, you may find these forex trading principals very similar to what you may have already been using in your stock or other asset investment. Let's analyze those rules, or at least the basic and most important ones.

1. Try to trade risking only a fraction of your invested capital. I myself used to trade risking 5% and more and very soon found out that this is pretty stupid idea. First of all, you never know and you can never predict with 100% accuracy where the price will go. If your guess was wrong there is no guarantee that your second trade attempt will also be lucky. The chances of missing the second time are smaller (it depends upon your trading strategy, tactics and market conditions), but they still prevail. I suggest using only 1 or 2% of your capital per trade and moving your stop loss to entry, in order to tighten your stops. The reason for such a low percent is the probability of extended volatility in the currency market.

Take, for instance the huge EUR/USD downtrend that started on August 2008 and lasted till October. The price plummeted from 1.5800 level to 1.2400 (about 3400 pips) in just three months. As you can see the price went down without many retracements, which means that the ones who traded against the trend expecting the price reversal, lost their money. It all came down to how much they risked per trade. Apparently those who traded with small sums must have retained part of their capital, unless they used scalping against the trend technique in such volatile conditions.

2. Plan your trade and trade your plan. Entering a trade is very easy; it's planning, analyzing and waiting for an entry opportunity that's is difficult. First of all you must use some sort of trading methods, involving forex indicators choice, configuration of indicator parameters, time frame, trade hours, stop loss and so on. With this set of trading tools you have to wait for the suitable, confirmed by indicators, moment to enter the trade. After the trade is made, you must keep to your trading rules that you have defined before making a trade. You will always be tempted to move your stop loss, in case the market turns against you or close your position with a small plus fearing that the profit target won't be reached. Stick to your trading rules no matter what, and in the worst case ever scenario (5 wrong successive trades) take a break for a day or two.

In June 2010 I had to face margin call just because I broke the rules of my trading plan. I decided to trade EUR/USD breakout south, expecting the EUR/USD downtrend from 1.3787 level. A daily price chart indicated an obvious head and shoulders pattern, and several sell orders were made accordingly. After that level was breached, I opened my positions. When the price went down about 40 pips, I did not move my stops to break even, even though it was part of my trading strategy. The price quickly bounced back and went the opposite direction. Then I made another mistake and extended all my stops to 200 pips at 1.4000, which was against my strategy. When the stop loss orders had been triggered, I made another mistake - started revenging the market (more detailed story in the following tip below).

3. Do not try ever to avenge the market. There will always be days when you will think the whole forex business has turned against you. You make one trade - you lose, you follow the trend - it reverses almost the next second you enter the trade. You try to enter one more trade - you lose again. Sometimes there is no explanation for such crazy forex movements and they definitely will not fit any technical pattern. It could be Moody releasing shocking news and the next hour changing their mind by over judged economical condition. It could be some manipulative bank selling $20 billion and buying the next hour, it could be anything, in fact. The truth is, you cannot compete with such money monsters, and that's why it's far better to reconcile with few lost trades and shut down your platform. Cooling off and staying off the market will save your nerves and money. The next day you may do a thorough analysis of what went wrong and how to avoid it.

I did not follow that tip on June 2010 which cost me almost all my invested capital. After losing several trades in a row, I was so mad, I opened the more orders with larger stops against the accumulating trend, hoping for a reversal. Well, the price did not retrace and instead of shutting down my trading platform, I continued opening lousy, losing trades, based on emotions.

4. The right money management can do more than good money strategy. If you are winning a few trades in a row and one unsuccessful trade takes all your profit away, there is something wrong with your money management. I myself keep to the idea of making one good trade bringing many pips and cutting my losses to the smallest number possible. This way I can make 3 mistakes versus one right decision and still be in profit. It depends upon a trading style and strategy, but this is how I do this and it usually works.

Even though the tips discussed above may seem quite basic and simple, they get hard to stick to in a really volatile forex market, especially when a particular strategy doesn't work in certain conditions. That's why it's important to remember the fundamental things in forex that may save your capital when the market turns against you.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.