The more I lose in forex trading, the more I learn. I learn more things from losing than from winning. And as time goes by, I learn to adjust my thinking and strategy and learn to have a fixed set of ideas about the market that I use to trade with. These set of ideas are based on rules to help you become more successful in trading. These rules have changed the way I trade for the better and I hope it change yours too.

#1 – Never Lose Money

Rule # 1 is the most basic. Never lose money. The more you trade, the more you lose. That is why, you need rule number 1 to be picky on trades that will only result in winning. Keep in mind this rule every time. Before entering, while in the trade and before exiting the trade. Never lose money. You’ll last longer and learn faster.

#2 – Think For Yourself

Learn a forex strategy then stick with it. You enter and exit by those rules defined only by you. What your peers or your guru tells you is irrelevant. If he tells you to enter the trade, you are not trading, but he is. You are now dependent on him when to exit. Will you ever know when that is? Will you ever sleep at night?

#3 – Use A Non-Negotiable Stop

Stop loss should be non negotiable. You do not use a stop then try to adjust it because it will be hit by the price then hoping that the price comes back. Stick to the plan. Have a defined amount of risk, accept that risk and don’t whine if it got hit. Man up, take the loss, move on to the next trade.

#4 – Let Your Profits Run

I used to have a take profit when trading. But I soon realized that it doesn’t make sense. Why would I settle with a fixed profit if the market is willing to give me more? Throwing your greed aside, putting your stop loss on break even, then letting the trade run is a 0% risk with greater profit potential. Its definitely better than a measly profit for small risk.

#5 – Define Your Risk and Forget About The Target

In any trading and investing books that I read, these lines always comes up “Cut your losses short and let your profits run”. Its a combination of #3 and #4. In my own words, this also means, never add to losing positions or adjusting your stop loss because you are “afraid” to take a hit and then defining your profit target instead of “risking” for a chance to earn more.

#6 – Take Note of Your Mistakes

Reflect on each losing trade. What made you lose it? Did you follow your plan? Is it you who messed up the trade because of greed and fear? Or is it some underlying factor that you might have missed like news? Whatever that is, always reflect if you are following your system and what is wrong or missing with your system so you can adjust and adapt to the ever changing market.

#7 – Victory Loves Preparation

Waiting for the perfect time to enter is what makes forex trading exciting. Its damn hard to sit still while you wait for the perfect time to make that order. And then wait some more for the trade to unfold itself. Trading is waiting game. Its a damn exciting game I must say and usually, the person who waits and “prepare” himself for the high probability trade would be the winner. Not being swayed by the crowd is the hallmark of a great trader.

I got burned a few times because I got in so early. And got frustrated when I got left out by the trend. Patience is a virtue they say, but in forex trading, patience is money.

Before you start trading forex for full time, make sure that you have everything covered. Though, not all people are risk takers and will quit their day job on a whim (like me), you must be prepared on to a new journey of your life. You will look back and if you become successful at this, you’ll realize that its the best decision you’ve made in your life. There’s no better feeling than being your own boss and eating your own kill.

#1  – Money To Keep You Afloat

Save at least 8 months worth of your expenses. Compute all of your expenses per month and then set aside money to pay that expenses for 8 months. This should keep you out of worrying where to get the money to pay for your rent, electricity, water etc. should you take consistent lose on your trading.

#2 – Trading Capital

This is probably will come from a personal preference. But for starters, I’ll try to give a more concrete estimate on how much should your trading capital be. Forget about the trading system for now. Let’s say that your trading system (thru backtesting) produces consistent profits at the rate of 10% per month. And your monthly expenses is let’s say, P20,000 per month. How much funds do you need to produce P20,000 for 10%?

x = TARGET INCOME / % RETURN
x = 20,000 / 0.1
x = 200,000

The answer is P200,000. If you need P20,000 to live with 10% increase per month. You need P200,000 of initial funds. Whatever your target income per month, just use the formula above.

#3 – Money Management System

You also need, and probably the most important thing, to have a money management system. This is not merely how much money should you risk per trade. This is also, how much money should you risk again should you know you are right. And how much money should you take out if you’re right and how much money should you cut off if you’re wrong. There’s a lot of things going on in a money management system, please do a careful research first before trying to broke yourself in trading. Victory loves preparation.

There’s a lot of books in money management. But there’s only one that comes to mind.

Trade Your Way to Financial Freedom

#4 – Trading System

A trading system is a system that will tell you when you will enter and exit the trade. In searching for a system, give more emphasis to the exit strategy than the entry strategy. Why? Because it can either be the profit taking or the cutting of losses in which either case can affect your account and your mental state. Don’t get too hang up on trading strategy, just a simple trading strategy will do. The most important part in your trading is money management and trading psychology.

There’s a lot of books that teaches trading systems. But I guess its up to you on what you will choose. I’ll just refer you to a book about different successful traders of our time so you will know what trading strategies they are using and decide for yourself:

Market Wizards: Interviews with Top Traders

#5 – Trading Psychology

Emotions are the main enemy in trading. That’s why you should learn to control them. Read books about trading psychology to be aware if you’re acting on emotions or rational decisions. There are times when you will suffer consistent winners and consistent losing streaks. Having the mental toughness to overcome that will make you a great trader so never try to skip step and proceed trading without practice. If there is one book I would recommend for this topic, its:

Trading in the Zone

Trading, whatever markets you are into is still the same, making profit out of the volatility of the price. Whatever you use to have an edge over the market is a personal reference and thus every person may have a different way to try to trade the market. Thus, there is no one person that can claim that there is only 1 way to trade.

I am using technical analysis to try and trade forex. But its only 10% of my whole trading system. Its not even that important. When I try to share this knowledge, you may already being branded as a fundamental analyst and this can raise eyebrows. What else can you be using aside from technical analysis?

I think there is a perversion in technical analysis today. Trying to claim that it is a the holy grail to trading. I think there is none. I think its a probabilities game. Its all guesses and betting money for that hunch. Ok maybe its still predicting, but its more like a perverted way to say LONG or SHORT by saying, the market will go down at this price and bounce back at this price and we can enter to earn this amount.

You can not be that too much precise as if you know the next move. Even elliot wave, which I have quit a bit of time learning, will never tell you when is an extension of a wave will end. Where a correction will end or when the extension of that correction will end. So, when do you enter?

Just because everybody is doing it, it is the right thing. More often than not, it is the wrong. Or if it is right, when will you know when it is wrong? Markets change, trading strategies become obsolete. At one point in time, one system will not work anymore. So how will you know that your trading strategies is already dead? Because your mentor is still using it? Its not a very good indicator is it?

Thinking for yourself and welcoming new ideas is the evolutionary quality that makes great traders. If you try to shoot down any new concept because it wasn’t the way you were taught, you will find yourself old with an old system that doesn’t work. The world and the market has moved on and you can never adapt.