4 Do’s and Don’ts of Forex Trading

With over $6 trillion traded daily, the forex market is incredibly huge, and with its colossal volume comes great opportunities. Specific approaches to trading produce excellent results, while others can lead to a decline in equity or capital, thereby preventing traders from making profitable trading decisions. 

Though there aren’t any hard and fast rules about trading strategies and techniques, there are some rules and habits that successful traders learn and implement. These rules have provided excellent trading results over the years, and fortunately, we will discuss them in this article. Keep reading to learn these ‘do’s’ and ‘don’ts’ of forex trading and their impact on your trading results.

Forex – Do’s

Use proper risk management

As a forex trader or investor, risk management is crucial to your success. Always outline your risk management parameters by deciding how much you’re willing to lose before executing your trades. If you are trading on a forex broker such as Oanda, you can use stop losses to manage your risk and control losses. As an investor, you can also manage risk by specifying the percentage of your capital that you’re willing to risk on a specific forex trade or investment. 

Carry out research and analysis

Forex market research and analysis help you make informed decisions. As an investor, you need to research and understand the current trading environment. Technical analysis books explain how to study price charts using trading strategies, theories and indicators to forecast price movement. Fundamental analysis can be carried out by analysing economic data and news reports. 

Additional research could involve seasonal tendencies and Intermarket analysis. Using the charting tools of the best forex brokers could help you make better trading and investment decisions and increases the likelihood of making sound investment choices. 

Manage your stress and emotions

The majority of trading and investment errors stem from emotional trading decisions. As a forex trader and investor, you need to control your emotions and create a stress-free trading environment. 

Emotions can cloud your judgement and lead to impulsive behaviour. Managing your emotions can be difficult at first, but it becomes easier with practice. 

Keep a journal and record your thoughts, feelings and actions. This will help you understand your triggers and impulses. This understanding is the first step to keeping your emotions in check, allowing you to make objective trading decisions.  

Have a trading plan and stick to it

Before investing in the forex market, you need to create a plan – a trading or investment plan. This plan should contain a detailed description of the strategies that guide your forex trading and investment decisions. 

The trading plan is a set of instructions that guide your trading activities and decisions. This helps you trade systematically and prevents you from taking random trades. Trading systematically ensures that your profitable trading results are reproducible. 

Forex don’ts

Don’t execute revenge trades

Revenge trades are executed when a trader incurs a significant loss. They’re not well thought out because they’re taken for the sole purpose of recovering losses quickly. Beginners guides to forex trading don’t typically warn users about revenge trading in advance, and if they do – novices can assume that they won’t fall victim. Revenge trades are executed as emotional responses to losing trades, and more often than not, they lead to more losses due to the lack of proper risk management. 

After incurring losses as an investor, take some time off to manage your emotions and resume trading when you can make rational trading decisions again. 

Don’t rush into live trading

New traders often set unrealistic expectations, and sometimes these expectations cause them to trade or invest with live funds without adequate preparation and experience. 

The problem is that losing live funds too early in your trading journey can hurt you emotionally. The inability to process and control these emotions early on is the reason why many new traders quit. 

Spend as much time as you need to on a demo account until you feel confident that your demo trading results can be replicated on a live trading account. 

Don’t place multiple correlated trades

Correlated trades are trades or investments that are closely related and, as such, tend to move in the same direction at the same time. Some currencies like the Australian dollar and New Zealand dollar are strongly correlated. Investing in multiple correlated assets increases your risk on each of the investments. When one of the investments fails, the other would most likely follow. 

This can lead to huge losses due to the close correlation between the assets. Diversifying your portfolio is a great way to create a buffer for your capital! 

Don’t compare yourself to others

Every trader is unique because, as traders, we have different personalities and approaches to forex trading and investment. Our uniqueness also affects our results and determines the trajectory of our learning curves. 

Some traders become consistently profitable after a year, while some take up to five years to find that consistency. Either way, it’s best to focus on your journey and find ways to improve your trading results. Don’t get intimidated and distracted by other traders, but remember that you are your only competition. 

Ultimately, forex traders and investors have different trading rules based on their experiences and personalities. Ensure you follow your rules and adopt the proper trading habits, as discussed in this article.