Forex trading rules help traders make better decisions. If you’re new to this market, understanding the rules is as important as finding out the answers to questions such as What Is Forex Trading and How Do You Trade Forex Step-By-Step.
In this guide, we’ll be looking at the key rules for trading and how to implement them. Find out the role played by discipline and planning when you start to implement the Forex rules.
Forex Trading Rules - What They Are And Why They Matter
Using rules for trading purposes is a smart way to add more discipline and consistency to your actions. This method reduces or removes impulsivity, letting you make decisions based on a set of Forex rules written in advance.
Rather than making up your moves as you go, you’ll be working to a plan that’s already in place. This covers areas such as how many trades to make, when to take profits, and when to cut your losses on a losing position.
Basically, you have something to guide you every step of the way. This is particularly useful for beginners but also helps experienced traders. These rules give you a plan that you can trust to take the emotion out of trading.
By using rules, you can also review your performance and ensure that you’ve been applying them correctly. You might need to add some new rules in the future, or make them more suitable for your style, depending on the results you’ve achieved using them.
These aren’t hard and fast rules that can’t be altered. Rather, you could consider them as guidelines you should constantly revise based on the results you’ve obtained so far and how your knowledge is growing as you trade more.
Forex Trading Rules for Beginners - The One-Page Rulebook
Having the right rules for Forex trading in place lets you proceed with confidence. Not everyone uses the same points to guide them all the time. Yet, the same basic rules and guidelines can be used by anyone looking to get started safely.
The following are examples of the main Forex trading rules that every trader should stick to. They include the potential pitfalls where traders most commonly make mistakes and lose money.
Plan Before You Trade
You should know what you want to achieve and how you plan to get there. This means fully understanding the trade you have in mind. Think in advance about the levels where you would want to close the positions, such as when it would make sense to cut your losses.
You’ll need to study each trade’s potential before you enter it. Take into account the latest charts and news stories, as they tell you what is likely to affect your trade.
You’re then ready to make trades that aren’t simply gambles. Good planning takes time, but it pays you back in terms of the greater security it provides for your trades.
Risk a Small Amount on Each Trade
It isn’t wise to put all your funds into each trade, as this means you run the risk of losing heavily. By putting a small amount into each trade, you give yourself the chance of finding a sustainable approach.
Stick to these trading discipline rules even when you feel strongly that you know how a trade is going to work out.
The general rule followed by many traders is to never use more than 1% or 2% of their overall trading capital on a single Forex trade. This means that even ten consecutive losing trades would only cost you 10% of the amount that you’ve set aside for trading.
For your first trades, you could decide that 1% is enough. If you feel that you want to increase this amount as you gain experience, take it slowly and don’t make the changes too drastic. You may feel confident after your first trades and feel that it makes sense to add more funds, but there’s no guarantee you’ll continue in the same vein.
Place the Stop When You’re Wrong
Not every trade you make is going to work out as you expect. Because of this, you need to be ready to cut your losses if a trade starts going in the wrong direction. Let your winning trades run, but if you see that a trade is going badly, it makes sense to cut it short.
When entering a trade, the stop-loss order is vital. This limit sets a position to be automatically closed. The take-profit order is similar, but it closes the position once you’ve reached the amount of profit you have in mind.
You can also use a trailing stop-loss that follows the price, or do this manually. For example, if you see that the price moves in the right direction, you can move your stop loss to reflect the current situation.
Equally, if it’s moving in the wrong direction, you might want to close the position early so that you can try something else.
The Risk–Reward Ratio Must Make Sense
Before making any Forex trades, you should consider whether the risk-reward ratio is worth it. For example, it doesn’t make sense to place a trade if there’s a greater chance of losing than there is of winning. It has to be something that appears sustainable in the long run.
By dividing your maximum potential risk by the maximum potential reward, you’ll see whether each trade makes sense. Some traders aim for a 1:2 ratio to ensure that the reward potential is double the risk. Others look for an even better ratio on their trades.
Set a Daily Loss Limit
It can be easy to get carried away and start chasing profits when things aren’t going well. However, you should be careful to avoid committing more than you would be comfortable losing in a single day.
When starting to trade Forex, it’s recommended that you don’t use more than 1% of your capital daily. Experienced traders may choose to use up to 3% each day, which is effectively the daily loss limit.
Only take valid setups
This phrase explains how your Forex rules should see you only enter trades that meet your strategy. Be clear about what kind of position you want to enter, and don’t attempt to make trades that don’t fit this style.
You might want to set a time and market for all of your trades. This is also useful when you need to consider if you’re going to limit yourself to certain kinds of trades, like scalping or day trading.
Have Clear Exits
Even the best trades reach a point where you need to exit. Being clear about your exit point before you start will make it easier to lose the position at the right time.
This is where your stop-loss and take-profit limits will help to keep you on track. You might also want to manually track the position and change your limits if necessary. This is especially important if breaking news threatens to affect your trade.
Know When Not to Trade
Not every moment is ideal for trading. Forex risk levels increase before and after major economic news or events, as this is when market volatility tends to increase.
Liquidity levels tend to drop when a major announcement or event is expected. The periods of the day without overlaps from the major trading sessions around the planet also tend to have lower liquidity and the risk of higher volatility.
Follow the Process, Not Feelings
Once you set out your rules of trading Forex, you can simply stick to them. This removes the emotional aspect of trading that can lead to you making poor decisions and adds more trading discipline.
If in doubt, check your plan to find out what you should do next. In this way, you don’t need to worry about making up your trades as you go.
Put the Forex Trading Rules Into Action (Practice First, Then Live)
Creating a set of rules for trading Forex is a great starting point. You can then use a demo mode that gives you a gentle start.
This is a smart way to practise putting your trading rules into action. You can rehearse your entry and exit points without putting your own money on the line. This will give you valuable experience in areas like daily loss limits and risk vs reward.
Follow the steps we’ve looked at and treat your demo trading sessions like real trading. By doing this, you can see exactly how your plan plays out before using real money.
Of course, none of this provides a guarantee that you’ll win every time you trade. However, it helps see what works well without any risks.
A demo trading platform is the best place to get used to your Forex trading rules. You can then choose when to start trading Forex with real money, confident that you have the rules in place to make it work.
Forex Trading Rules for Beginners - FAQs
Should I Use Leverage as Part of My Forex Rules?
Leverage is commonly used in Forex trading, but you should be aware that leverage can lead to losses, as it amplifies your results.
Do the Same Forex Trading Rules for Beginners Apply to Everyone?
The same basic rules of Forex trading can be used by any trader, regardless of their experience. However, more experienced traders may tweak the rules to suit their needs and situation.
Should I Trade Forex Every Day?
Choose a trading routine that suits you. While the Forex market operates on a 24/5 basis, there is no need to believe that you have to trade at every available opportunity. Choosing your trades carefully is a big part of your Forex risk management approach.
What Is an Acceptable Risk-to-Reward Ratio?
There isn’t a single figure that is recommended for this ratio. However, some traders suggest that a 1:2 ratio is sufficient, as this may double the profit potential compared to the risk incurred.
Do I Need to Start with a Demo Trading Account?
You can start trading with real cash right away if you prefer. Yet, a majority of new traders find that using a demo account gives them the most sensible way to start trading comfortably while getting used to their trading rules.
Does Following Forex Trading Rules Remove the Risk of Loss?
No, Forex trading always has an element of risk about it. By creating a set of trading rules and sticking to them, you simply increase your chances of making good decisions.
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