“You are remembered for the rules you break” is a famous quote that we often hear, but breaking the rules never gives a pleasant memory when you are a forex trader. Yes, we always say there is no fixed set of rules in trading, and a trader can choose the best course of action based on their needs and requirements. However, there are some rules that you need to follow to stop yourself from committing costly mistakes as a forex trader. Today, you will learn about the top 10 rules you should never break in forex trading and the consequences you will face when these golden rules are broken. Knowing how things can go wrong persuades us to do it right and get the best possible results.
- Maintaining enough Free Margin in your Trading Account
The first rule a forex trader should never break is maintaining enough free margin in a trading account. This rule can also be stated as keeping enough funds in your trading account and not risking all of it in trading. When we are on a demo account, we will be trading with virtual funds in the simulative setup without exposure to any real risk. Most brokers provide a capital of $10,000 for a seamless demo trading experience, and traders tend to take things easy. They will keep placing trades without worrying about the losses since they won’t be losing any real money.
But when you start trading on a live account, you will be the one responsible for funding the account with your hard-earned money. Starting small would be ideal for a beginner, but you need to have enough funds for trading without any difficulty. Your trade size should be determined on the basis of your account balance and risk tolerance, as well as the required margin levels. You can settle for a lower margin requirement while using leverage, but maintaining enough free margin is essential to avoid a margin call situation.
- Limit your risk per trade to 2%
The 2nd golden rule is made to safeguard your trading capital and is directly related to risk management in forex trading. While opening a trade on a live account, you will be risking real money as the market may not always move in your favour. The amount that you use for trading is actually at the risk of turning into a loss when you lose the trade. Traders who go all in for a single trade can lose a significant proportion of their trading capital really quickly, and this should be avoided at all costs. For those with a higher risk tolerance, you can think of increasing the risk percentage but still keeping it below 5% of your account balance in any situation.
For this, you need to limit your risk per trade to 2% of your trading capital, and appropriate position sizing is the basis for following this rule in the actual trading process. However, determining the optimal position size can be hard for a beginner due to the complicated calculations involved. Using tools like trading calculators will make the process easier while providing accurate values quickly to support your trading decisions. Apart from position size, these calculators are also used to determine other key metrics like pip value, potential profits/losses, and more.
- Don’t try to Forecast the future
Contrary to popular belief, the job of a forex trader is not about forecasting the future events that are about to take place in the currency market. In fact, it would be impossible to predict currency price movements with 100% accuracy, even if you have 100 years of experience in the forex market. It is true that some level of predicting is involved when we trade, but it is more like a logical response to the present market scenario.
We can only analyse real-time data while trying to sense the potential fluctuations by relating them to the past based on historical events. This is the essence of technical analysis in trading. But in the end, we are just responding to the signs and signals that we spot from price action or fundamental analysis and taking a trading decision based on that. You can have a futuristic outlook, but don’t make conclusions based on your intuition, as logic needs to be there behind every trading decision.
- Do not engage in overtrading
Refraining from overtrading is one of those rules that all of us know about, but we still end up breaking it intentionally or accidentally. Sometimes, we do it out of sudden impulses when our emotions are controlling us. But in most cases, our urge to overtrade is simply a result of our fear of missing out on good trading opportunities.
We are tempted to take a trade every time we spot an opportunity, even if the setup does not have any connection with our original strategy. However, entering more trades will only add up to the risk, and you need to accept the fact that not every opportunity is meant for us in trading. You need to be patient and wait for the right one to make the most out of your trades to make the risk worthwhile.
- Don’t make things ambiguous with over-analysis
It is true that the same market event can be interpreted in multiple ways, and this is what adds complexity to market analysis. Over-analysing a market situation will only result in a lot of confusion. You may even end up not entering a trade because you were too busy thinking about all the possible outcomes. You will waste a lot of time in analysis and miss out on the opportunity there for you.
This is the opposite of overtrading, as you fail to trade enough, and this is another reason many traders remain stuck without progress. So, you need to strike a balance and be quick with analysis since you need to take timely action as a trader.
- Stay True to your Trading Plan
One of the major mistakes that many traders make in the forex market is deviating from their original strategy or plan. The strategy exists for a reason, and you are supposed to follow your plan in the best possible way. You can make changes and adjustments from time to time, but the revised strategy should only be implemented after proper backtesting on your chosen platform. It is better to use a feature-packed trading platform like MT5. This platform offers many useful features, including more timeframes, indicators, and intuitive UI. Avoid entering random trades that do not align with your trading plan, and don’t switch your strategy without a valid reason.
- Try Longer Timeframes
Newbies often prefer shorter time frames while trading, which may not be the best approach for someone with little to no experience in the forex market. It would be better to analyse the longer timeframes first as it gives you more insights into the market situation. When you want to confirm a trend, comparing the price action in different timeframes will be easier. So, start with weekly charts and then you can check daily charts or hourly charts based on your strategy.
- Take breaks, but don’t quit
The urge to quit trading is real when a beginner encounters several losses in a row. The losses in the initial phase will be hard to accept and digest for a newbie, and taking a break is absolutely fine until you feel ready to trade again. But you should never give up on trading as a whole due to the losing streak that happens once in a while.
- Pay attention to your risk/reward ratio
An optimal risk/reward ratio is essential to ensure your profitability in trading. In most cases, a risk/reward ratio of 1:3 is seen as ideal as it allows you to make enough profits even with a low winning rate. Those with a higher win rate can go for a 1:2 risk/reward ratio, but anything below that is not worth the risk.
- Trade like a professional
Trading with a professional approach is necessary even if you are not a full-time trader. You need to avoid getting emotional or restless while trading, as it stops you from doing your best as a trader. Watching your trades all day long will drain your energy and add to the stress. Learn to detach yourself from the process but be consistent and disciplined. This is the key to attaining long-term success in the forex market.
Now you know about all the rules that need to be obeyed in the forex world, and how well you follow them will determine your success in trading. Finally, be patient and optimistic even when you fail because withstanding the test of time is necessary to reach your goals as a forex trader.