Most new traders start trading forex without much planning or preparation and they lose money…FAST! I remember my first forex account, funded with 800 USD, was down to 300 USD within 2 weeks. It was like a snowball going downhill, gathering speed and momentum with losses piling on. At that time, I decided I couldn’t deposit more money into my forex account until I got a grip on what I was doing. So why did my account lose half of its value in such a short period of time? The answer is “Over-Trading”. Here are some rules that you can put in place to limit your risk and give yourself a chance to start turning profits.
1. Don’t Use Too Much Leverage
If you are risking more than 4% of your account on any single trade, you are really asking for quick end to your forex trading career. This means that your stop-loss (non-negotiable) must be close enough to your entry to ensure that you will not lose more than 4% of your equity. Keep in mind that the market can “jump” from time to time, so your stop-loss probably needs to be even closer to compensate for unexpected “slippage”. If you do not have the discipline to adhere to your stop-losses, then just quit trading forex now!
2. Trade One, Clearly Defined, Entry Signal
When starting out, I recommend choosing one entry strategy and ONLY trading on that one strategy. You must have a clear definition of what it means to take an entry, and you can not trade unless you see that entry signal on the charts. This means that you may not take a trade ever day or every hour. It can be hard to stay on the sidelines when you see the markets moving, but you must stick to a simple trading plan that reduces judgment during the early stages of your forex trading career. As you gain experience and see consistent profits, you will be much more prepared to start trading more entry setups.
3. Know When To Take a Break from Trading
Sometimes your trade entry strategy isn’t working. I have a simple rule for day traders – 3 losers in a row and you are done for the day or you must go to paper trading. When you are ready to start trading again, start smaller (maybe half of your normal size) to ease back into a winning rhythm. One of the mistakes I made with my first account was over-leveraging myself after a string of losses (“trying to make it all back”). The best way to avoid this behavior is to restrict yourself from trading when you strategy isn’t working. Simply put, you need to make up your own rule for when to take a break from trading.
There are also other circumstances that can negatively affect your trading like lack of sleep, illness, family issues, and many others. You need to be aware of your body and mind so you can decide when you are fit for trading and when it is best to take a breather.
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