The world of forex trading is an amazing one. It’s open 24 hours a day, boasts the highest dollar value in daily trading volume and offers unmatched leverage. It’s little wonder that the forex market continues to draw large numbers of retail traders looking to make some neat profits every day.
Despite the advantages of trading forex, bear in mind that the forex market is very volatile and presents traders with its fair share of risks. How can traders better manage their money, make consistent gains and minimise their losses? Start by keeping to these four simple rules:
1. Establish a trading plan and stick to it
They say the art of profitability lies in the management and execution of the trade. And a solid trading plan helps you do just that. How? By allowing you to preserve your capital and execute your set-ups well.
Set risk management rules and be faithful to them. Generally, traders are advised to not risk more than 3% of their capital in any single trade. Limiting your risks simply means limiting your losses. Also find a forex trading methodology that gives you the most consistent results. Make continual adjustments to your most reliable system and then look to mastering your edge!
2. Have stop losses in place
A stop-loss order – an order placed with a broker to sell a security once it reaches a predetermined price – minimises a trader’s losses. Traders benefit from implementing stop-loss orders as these ensure that a bad trade will not result in catastrophic losses or eliminate previous gains. Since it is automatically triggered when the stop price is reached, a stop-loss order also frees you from having to monitor prices daily.
3. Employ both fundamental and technical analysis
Using fundamental and technical analysis together can help traders have a better grasp of the market and the direction in which it is heading. Technical analysis includes the study of price charts, moving averages and other indicators. These are a good gauge of market sentiment and trends, and help you predict strategic entry or exit points. Meanwhile, fundamental analysis relies on economic data to evaluate currency value and movements. Key data to monitor would include GDP and inflation rates (important market news and indicators are outlined here).
Combining both types of analysis will present the trader with a more holistic view of the currency’s potential moves and a more efficient forex trading strategy.
4. Trade logically, not emotionally
Trading decisions should never be made under emotional influence or impulse. Successful traders are those who exercise patience and discipline. They avoid giving in to temptations (e.g. motivated by greed or overconfidence) and understand that (contained) losses are part and parcel of trading. Learn to manage your emotions so that you never lose sight of your endgame (i.e. long-term profits and minimal losses). Here’s also where the first three rules come into play. Sticking to a proven plan, setting stop losses and strengthening your strategy with both fundamental and technical analysis will help you to trade with reason, logic and success!