The Commandment I : You Should Constantly Guard Your Capital
Without capital, you’ve got nothing to trade. Buying and selling any forex, by means of nature, has evident risks involved. However, you need to put down your capital on the table to gain profit. It is not feasible to be right all the time, consequently, you need to guard yourself and your margin account at all times. You’ll lose trades along the way, it is not possible to avoid, but correct margin control will assure your chance of winning to increase.
A Simple Rule:
Never have greater than 2% of your margin account at risk at any time. Do not allow the risk to accumulate consecutively.
Losing trades are part of trading, however minimizing the losses is crucial to success. Reduce your losses and let your winners keep its position until target point. Constantly change with a stop loss value. Studies have proven that investors who trade with stops make more money than those who do not. If you are getting stopped out often the problem is not the stop, it’s your entry!
The Commandment II : You Should Have a Plan
It is a very simple idea: plot your trade, and execute your plan. Those who fail to do are likely to fail. Prior to buying any position, you are ought to have a buying and selling plan for that currency. 1:1 risk-to-reward ratio is good place to start. Your trading plan need to include the following factors:
Scaled in entry points on resistance/support lines based on technical analysis.
Stop levels that constitute the proper risk-to-reward ratio, which always result in an odd number whose ending digit is a three or a seven. Ex) 110.13 or 110.17
Definition of the point where you’ll pass your stop to break even, including enough to cover the spread.
Scaled out exit points for profit at key resistance/support levels based totally on technical analysis
Always have a clear target lines based on technical analysis, preferably two targets.
The quantity and size lots you are willing to trade in the currency loss.
Be aware of all upcoming fundamental announcements, the time they occur, and their influence on each currency.
Observe how the plan proves itself. You may have a great plan, and it still can lose.
The Commandment III : You Should Learn to Sustain, Endure and Be Patient
There is a saying “wait until the trade comes to you”. For day-trading, you must wait for a currency to reach or break certain points before placing the buy or sell order. Once you have the trade plan, stick to the plan. You must let the entry reach the point that will maximize your trade profit.
Master the “wait” trade as a part of your trade system.
The Commandment IV : You Should Scale In or Scale Out
You should not enter a full position on a currency in one order, unless there is absolutely 100% assurance on the profit possibility. If not, you must scale into a position initially rather than placing 100% of your lots. As your trade lose momentum, you should scale out of the position. Scaling in is the practice of putting 2 to 4 planned entry executions in a given trade at the appropriate price levels. Scaling out is the practice of putting all of your lots into a trade initially and removing them in halves or thirds as profits are realized.
You must look for several entries at key areas of resistance/support levels, trend lines, fibs, or other targets on the charts. The first trade always carries the most risk, but If your first entry is wrong, you have second, third and fourth entry from your scaled in position. By making a habit of Scaling in and out, you will not be tied up with too much margin account capital in one currency at a time.
Ex) one 3-lot trade < three 1-lot trade.
By scaling in, you are minimizing the amount of time the full amount of your capital is tied up in the trade.
Ex) Trading 1 standard lot < Trading 9 mini lots
Trading 1 mini lot < Trading 9 micro lots
Enter with 1/3 of your lots, adding other 2/3 only after the trade proves itself.
By using this strategy, you have more entry and exit opportunities. Scaling out of a position serves 2 purposes.
It allows you to increase your total gain and free up margin account capital while you are trading. By taking profit on half or a third of the position at the first resistance level, you can hold the remaining position for a larger gain, while minimizing the risk of a losing trade. If that resistance level is not broken on the first attempt, and the currency retraces, you can add another position, or simply keep the remaining original position for an eventual breakout above/below the support/resistance.
It gives freedom to trade capital for other additional currencies. This allows you to spread your risk, to lose small and to win more often. You must maintain your margin account balance so you don’t risk more than 2% of the total as you are adding positions. Don’t take the risk of resulting in a margin call.
Your goal is to keep the trade consistent and short. Enter at the lowest possible cost and have the lowest average cost. Scaled exit on half of your positions when the first resistance/support level holds. Holding the remaining half comfortably will work as advantage, because scaled entries and exits are very closely tied to good margin management.
The Commandment V : You Should Use Technical & Fundamental Analysis
The unspoken law is that short-term trading is based on technical analysis and long-term trading is based on fundamental analysis. However, for day-trading, you need both technical and fundamental analysis.
There are times fundamental announcements override technical analysis in currency behaviors, but technical analysis rules except for those overriding occasions.
You should make a habit of having no open trades whenever a major fundamental announcement is taking place. Keep track of several online sources of economic calendar announcements, then after the announcement is released, wait for the reaction. If there is a strong reaction to the news your stops are not guaranteed, if is safer to exit. You can always re-enter.
For examining technical analysis, look primarily for areas in the charts with as few obstacles to your trade as possible. These “wide open spaces” will allow you to reduce the overall losses and still maximize the profit. Once you make your comfort zone, wait for the proprietary trade set up to materialize. Manager your trade to stay at the predetermined target.