The Forex market is a fast-moving, highly liquid, and volatile financial market. Unlike the stock market, the currencies market never closes or stops moving. Traders have earned profits quickly or lost money throughout the trading day and night. Novice traders often wonder how experienced traders are able to survive and succeed in this fast-paced and mysterious market.
There is only one way: Learn the rules of the Forex market.
Forex traders must learn the rules of survival (and success) in the currencies market. These rules are essential for the Forex trader to learn in order to protect his or her money in the trading account and to earn strong and lasting profits.
The following list shows the basic rules of Forex trading. They may seem basic or obvious, but they are indispensable to success in the Forex market.
It is important for novice traders to learn and follow these three basic rules. Stock traders and commodities traders can also benefit from following these rules. Experienced traders (in most financial markets) may already be familiar with these rules though they can sometimes use a reminder. But beginning traders should learn and follow these rules.
Rule #1: Trade with a System.
One of the most common reasons that traders fail and lose money in the Forex market is that they do not trade with a system. Every trader must have a plan or trading system that he or she uses to decide when to trade a currency pair, what currency pair to trade, when to take profits, and even when to cut losses. A trading system takes the guesswork, uncertainty, and emotion (particularly fear and greed) out of the trader’s decision-making process.
Novice traders believe that a trading system will cause them to miss out on profitable trades. They erroneously believe that trading parameters are too restrictive and limiting. A good trading system should be restrictive because there are an enormous number of trading opportunities in the Forex market. A good trading system will find and focus on the best trading opportunities and present the best way to make the most profit on the trade. It should also present the best way to minimize losses.
Without a good trading system, the Forex trader does not have any direction and will not know how to lock in profits or exit a losing trade. Therefore, a trader should always use a trading system.
Rule #2: Focus on 2 or 3 Currency Pairs.
In the Forex market, there are hundreds of different currency pairs. Each pair presents both a bullish trade and bearish trade. Many different factors cause a currency pair to move. Fundamental factors, such as employment data, can cause a currency to change in price. Technical factors, like moving average lines and Japanese candlesticks, can affect the currency price.
In fact, there are so many different currencies, currency pairs, and factors that affect them that it is impossible to keep up with all the information.
Novice traders view all of these currency pairs as potential trading opportunities. However, experienced traders focus on only a few currency pairs as potential trading opportunities. Focusing on a limited number of currency pairs allows the trader to understand how they move, why they move, and what affects their value. This information is essential for making profitable trades.
When choosing a currency pair, beginning Forex traders should focus on the major currencies. These are currencies with stable governments, strong central bank control, and a reliable trading record. Some currency pairs to focus on are: the EUR/USD, GBP/USD, EUR/GBP, USD/JPY, USD/NZD, or USD/CAD. Select only two or three of these pairs to trade. They present enough liquidity and strong trends to make reliable trades.
Some experienced traders will trade only the EUR/USD. This is the most traded currency pair in the world. During the US-European trading session, the EUR/USD will make strong and reliable price movements on which some traders make sufficient profits.
Beginning traders should only trade two or three currency pairs.
Rule #3 Learn how to Use Leverage Wisely.
The Forex market is unique in that it allows a trader the highest amount of leverage in all the financial markets. Most brokers offer a mini account in which the trader can have access to 200 percent leverage. A mini account can be opened for as little as $300. This is an enormous power for a novice trader with limited funds. While the profits can grow exponentially, the losses can accumulate quickly. However, novice traders who use the maximum leverage on every trade are assuming too much risk.
Leverage is a powerful tool in the Forex market. However, it must be used wisely. Maximum leverage does not need to be used on every trade. In fact, novice traders should never use the maximum amount of leverage. Using 50% (or maximum100%) of leverage is sufficient for the novice trader.
Traders must use leverage wisely and realize that it can be a double-edged sword. It can take a trade to new levels of profitability. Leverage can also cause losses to quickly deplete a trading account.
Beginning traders should limit the amount of leverage they use.
Successful Forex Trading
These three rules are essential for successfully trading in the Forex market. They can help the trader to make better trades, keep losses to a minimum, and make profits grow.
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