Forex Trading Articles

TRADING TIPS TO HELP YOU BECOME A BETTER TRADER
Part I

Forexmentor Team
© 2007, Currex Investment Services Inc.

Jan 2, 2007

New Year seems to be a great time to make or at least promise to make new changes for better. What will you do, to be a better trader this year?

We would like to help you become a better trader by providing you with trading tips that could both save you money in avoidable losses, and potentially lead to more profits.

1. Trade with risk capital only. Any money you put in to the markets must be risk capital, money you can afford to lose and not impact your financial situation. Do not trade if you need the money to pay bills. It's hard enough to be successful as a fledgling trader. You do not want the added pressure of having to make money and/or not being able to afford losing it.

2. Take the time to learn. In order to compete at the highest level in the trading business and be one of the few truly successful participants you must be well educated about what you are doing. This does not mean having a degree from a well respected university, the market doesn’t care where you were educated. There are many resources available these days, so there is no excuse for not entering the markets prepared to do the battle.

3. Forex trading is a zero sum game. For every long there is also a short. If 80% of the traders are on the long side, then the remaining 20% are on the short side. This means further that the shorts must be well capitalized and are considered to be strong hands. The 80%, who are holding much smaller positions per trader, are considered to be weaker hands who will be forced to liquidate those longs on any sudden turn in prices.

4. Use appropriate stop-loss orders AT ALL TIMES to cut your losses and never, ever sit back and let your losses run. Almost every trader at some point makes the mistake of letting his or her losses run in hopes that the market will eventually turn around in his or her favor but, more often than not, it simply leads to an even greater loss. You win some, you lose some. Simply learn to cut your losses, take your occasional lumps and move on to the next trade. And if you made a mistake, learn from it and don't do it again. To avoid letting your losses run, get into the habit of determining an acceptable profit target as well as an acceptable risk tolerance level for each and every forex trade before entering the market. Then simply place a stop-loss order at the appropriate price, but not very tight that the stop could quickly take you out of the position before the market has a chance to move in your favor.

5. Placing stop loss is an art. You must combine technical factors on the price chart with money management considerations. One of the most popular and effective methods of placing your protective stop is to find a support or resistance area that is within your loss parameter for that particular trade and place your stop just below that support or resistance area at a level not ending with zero.

6. Avoid placing protective stops at obvious round numbers. Protective stops on long positions should be placed below round numbers (10, 20, 25, 50, 65, 100) and on short positions above such numbers.

7. If you are a new trader, be a small trader (mini account) for at least a year, then analyze your good trades and your bad trades. You can really learn more from your bad ones. They’re expensive lessons, you paid for them. Analyze them and learn from them.

8. Trade with a plan, not with hope, greed, or fear. Plan where you will get in the market, how much you will risk on the trade, and where you will take your profits. Follow your plan. Once a position is established and stops are selected, do not get out unless the stop is reached or the fundamental reason for taking the position changes.

9. Five steps to build a trading system:
- Start with a concept.
- Turn it into a set of objective rules.
- Visually check it out on the charts.
- Formally test it with a demo.
- Evaluate the results.

10. Always think in terms of probabilities. Trading is all about thinking in probabilities NOT certainties. You can make all the “right” decisions and the trade still goes against you. This does not make it a “wrong” trade, just one of the many trades you will take which, through probability, are on the “loosing” side of your trading plan. Don’t expect not to have negative trades - they are a necessary part of the plan and cannot be avoided.

11. Trying to pin-point tops and bottoms in the forex market is very risky. If you're going to trade tops and bottoms, at least wait until the price action actually confirms that a top or a bottom has been formed before you take a position in the market. Exercising a little patience and waiting for a proven top or bottom to form can increase your odds of profiting and somewhat reduce your risk.

12. The double-top formation is confirmed only when the full completion of the two rallies and their respective reversals is followed by a breach of the neckline (the closing price is outside the neckline ).The failure of the price to break through the neckline puts on hold or negates the validity of the formation.

13. Learn to be comfortable being in the minority. If you are right on the market, most people will disagree with you. (90% losers,10% winners).

14. Carry a notebook/diary with you, and write down interesting market information and your personal observations. Re-read your notes from time to time and use them to help analyze your performance.

15. Patience is important not only in waiting for the right trades, but also in staying with trades that are working.

Proceed to the next section

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