basic principles of forex trade

1. Trading is an investment not an income.

It is important to have a realistic expectation of what you can achieve through forex trading. The nature of trading is such that you may make a good return on your initial capital over an annual period, but during that period you may have a number of consecutive losing months, with only a few bumper months inbetween. Therefore, even daytraders cannot claim to make a fixed amount per month which equates to a salary. You need to have another source of income to support yourself while trading forex. NEVER borrow money to trade with.

2. You can’t predict the forex markets.

The forex markets are influenced by billions of traders, economic and political events. You simply cannot predict the direction and manner in which the markets will move.

Technical and fundamental analysis does much to provide a more educated guess than a simple coin toss but it is important to realise that each of these techniques will have a large failure rate. You will lose a large percentage of the time. Sometimes you will lose on more trades than you gain on. However, it is still possible to make money under these conditions by employing sound money management forex principles.

3. Let profits ride and cut your losses

The only way to make money from forex trading (or any form of trading) is by making enough money on your winning trades to cover your losses and to gain additional profit to grow your capital. This means letting your profitable trades ride and cutting your losses early. It is harder to put into practice than it sounds as psycologically it is much easier to “marry” your losing trades in the hope that the market will turn in your favour and grabbing your profit too soon when you see your hard earned gains slipping away as the market temporarily turns against you. 

4. Trade according to a tried and tested system

This is one of the most important forex principles. The only way to cut out emotion in trading and adopt a more business-like and informed approach is to use a system of rules that have been developed and tested on market data. In this way, all the trade decisions have already been made before you even enter the forex market. This is a much less time consuming and less stressful way to trade for a living. 

5. Employ a sound money management strategy

In our opinion, money management is the single most important aspect of any trading system and is badly neglected by forex beginners. It enables the trader to fully utilise their capital to grow their money as fast as possible while protecting them from excessive losses and final account blow out.

6. Don’t ignore the fundamentals

Fundamental economic principles drive the foreign exchange rates of the world over the long term. However, they have minimal effect over the short-term and are thus not reliable to use for daytrading decisions.

Having said that, economic announcements sometimes have a profound effect on the markets, causing movements of hundreds of pips in a matter of hours. Therefore forex beginners ignore them at their peril!

7. Don’t put your faith in the expert’s recommendations and comments 

There are literally hundreds of forex companies providing trading signals, daily commentary and trading recommendations. While it may be useful to read some of these to get an outside opinion, it can just be information overload for newcomers to the forex market, creating indecision and stress! Believe in your system and trade accordingly.

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