Years of studying trading strategies do not guarantee successful trading or consistency in the “live” market. When I started trading in the FX market about 10 years ago, I did not realize how difficult it is to be a sustainable trader and how important it is to define every parameter in advance when opening a position. My trading consisted of opening an uneven number of lots, an “ad hoc” stop loss strategy, and take profit would depend mostly on my “feel” for the market situation. Countless times, that “feel” for the market would abandon me at crucial moments, and the losses in those situations would be disproportionately large compared to the overall account balance. Can we trade effectively without a plan and firm rules? If there are no strictly defined rules, there is a high probability that the trader will fall into a trap, and if there is not enough experience, it is difficult to get out of that trap. This time we will try to address some of the most important rules in trading and explain why it is extremely important to adhere to them.
1. Follow the trend (“Trend is your friend”) – certainly one of the most important rules, as it should be kept in mind that the market is always right. Regardless of what type of trader you are, the correct approach is to open positions in accordance with the dominant trend, as there is a much higher probability that the price will continue to move in the existing trend. Some of the biggest losses I have incurred were precisely in positions opened against the trend. Corrections within the trend should be used as opportunities to enter a position in the direction of the dominant trend!
2. Define a trading plan – determine how much maximum money we can open each position with, determine the maximum acceptable risk according to the size of our account, determine the entry point into the position (technical or fundamental analysis), determine the timing of entry into the position, determine stop loss and take profit (risk/reward ratio). It is very important to adhere to each of the mentioned rules, as it should not happen that you move the stop loss because it seems to you that the market might return. Trading without a plan is like trying to sail across the ocean alone, without ever having sailed before!
3. Define the loss (stop loss) – there are two mistakes that traders most often repeat, not setting a stop loss and moving the stop loss. You can sometimes afford to repeat the second mistake, but not setting a stop loss at all is madness, especially in the FX market. If you trade with currency pairs that are exposed to high volatility, by not setting a stop loss, you can lose a good portion of your capital in a short time. Mathematics says that if you lose 50% of your money, you need to earn 100% to return to the initial amount!
