Top 10 Forex Trading Rules

Investopedia has given simple forex trading rules which a neophyte like me can follow. As they always say, practice makes perfect and the site offers practice trading to get me started until I can learn the ropes so to speak and choose my broker.

Trading Is An Art, Not A Science

The systems and ideas presented here stem from years of observation of price action in this market and provide high probability approaches to trading both trend and countertrend setups, but they are by no means a surefire guarantee of success. No trade setup is ever 100% accurate. Therefore, no rule in trading is ever absolute (except the one about always using stops!). Nevertheless, these 10 rules work well across a variety of market environments, and will help to keep you out of harm's way.

Never Let A Winner Turn Into A Loser
The FX markets can move fast, with gains turning into losses in a matter of minutes, making it critical to properly manage your capital. There is nothing worse than watching your trade be up 30 points one minute, only to see it completely reverse a short while later and take out your stop 40 points lower. You can protect your profits by using trailing stops and trading more than one lot.

Logic Wins; Impulse Kills
It can be a huge rush when a trader is on a winning streak, but just one bad loss can make the same trader give all of the profits and trading capital back to the market. Reason always trumps impulse because logically focused traders will know how to limit their losses, while impulsive traders are never more than one trade away from total bankruptcy.


Never Risk More Than 2% Per Trade
This is the most common and most violated rule in trading. Trading books are littered with stories of traders losing one, two, even five years' worth of profits in a single trade gone terribly wrong. By setting a 2% stop-loss for each trade, you would have to sustain 10 consecutive losing trades in a row to lose 20% of your account.

Use Both Technical And Fundamental Analysis
Both methods are important and have a hand in impacting price action. Fundamentals are good at dictating the broad themes in the market that can last for weeks months or even years. Technicals can change quickly and are useful for identifying specific entry and exit levels. A rule of thumb is to trigger fundamentally and enter and exit technically. For example, if the market is fundamentally a dollar-positive environment, we'd technically look for opportunties to buy on dips rather than sell on rallies.

Always Pair Strong With Weak
When a strong army is positioned against a weak army, the odds are heavily skewed toward the strong army winning. This is the way you should approach trading. When we trade currencies, we are always dealing in pairs - every trade involves buying one currency and shorting another. Because strength and weakness can last for some time as economic trends evolve, pairing the strong with the weak currency is one of the best ways for traders to gain an edge in the currency market.

Being Right And Early Means You Are Wrong
In FX, successful directional trades not only need to be right in analysis, but they also need to be right in timing as well. If the price action moves against you, even if the reasons for your trade remain valid, trust your eyes, respect the market and take a modest stop. In the currency market, being right and being early is the same as being wrong. Consider a scenario where a trader takes a short position during a rally in anticipation of a turnaround. The rally continues for longer than anticipated, so the trader exits early and takes a loss - only to find that the rally eventually did turn around and their original position could have been profitable.

Differentiate Between Scaling In And Adding To A Loser
The difference between adding to a loser and scaling in is your initial intent before you place the trade. Adding to a losing position that has gone beyond the point of your original risk is the wrong way to trade. There are, however, times when adding to a losing position is the right way to trade. For example, if your ultimate goal is to buy a 100,000 lot, and you establish a position in clips of 10,000 lots to get a better average price, this type of strategy is known as scaling in.

What Is Mathematically Optimal Is Psychologically Impossible
Novice traders who first approach the markets will often design very elegant, very profitable strategies that appear to generate millions of dollars on a computer backtest. Armed with such stellar research, these newbies fund their FX trading accounts and promptly proceed to lose all of their money. Why? Because trading is not logical but psychological in nature, and emotion will always overwhelm the intellect in the end. Conventional wisdom in the markets is that traders should always trade with a 2:1 reward-to-risk ratio, the trader can be wrong 6.5 times out of 10 and still make money. In practice this is quite difficult to achieve.

Risk Can Be Predetermined; Reward Is Unpredictable
Before entering every trade, you must know your pain threshold. You need to figure out what the worst-case scenario is and place your stop based on a monetary or technical level. Every trade, no matter how certain you are of its outcome, is an educated guess. Nothing is certain in trading. Reward, on the other hand, is unknown. When a currency moves, the move can be huge or small.

No Excuses, Ever
The "no excuses" rule is applicable to those times when the trader does not understand the price action of the markets. For example, if you are short a currency because you anticipate negative fundamental news and that news occurs, but the currency rallies instead, you must get out right away. If you do not understand what is going on in the market, it is always better to step aside and not trade. That way, you will not have to come up with excuses for why you blew up your account. It's acceptable to sustain a drawdown of 10% if it was the result of five consecutive losing trades that were stopped out at a 2% loss each. However, it is inexcusable to lose 10% on one trade because the trader refused to cut his losses.

Learn To Invest In 10 Steps

For a beginner who wants to invest, having the know how as well as learning the basic or simple steps to create an investment, this article from Investopdia can be a great help. Having no business degree and the technical savvy, I find it an easy reading and easy to follow, too.

Investing is actually pretty simple; you're basically putting your money to work for you so that you don't have to take a second job, or work overtime hours to increase your earning potential. There are many different ways to make an investment, such as stocks, bonds, mutual funds or real estate, and they don't always require a large sum of money to start.

Step 1: Get Your Finances In Order
Jumping into investing without first examining your finances is like jumping into the deep end of the pool without knowing how to swim. On top of the cost of living, payments to outstanding credit card balances and loans can eat into the amount of money left to invest. Luckily, investing doesn't require a significant sum to start.

Step 2: Learn The Basics
You don't need to be a financial expert to invest, but you do need to learn some basic terminology so that you are better equipped to make informed decisions. Learn the differences between stocks, bonds, mutual funds and certificates of deposit (CDs). You should also learn financial theories such as portfolio optimization, diversification and market efficiency. Reading books written by successful investors such as Warren Buffett or reading through the basic tutorials on Investopedia are great starting points.

Step 3: Set Goals
Once you have established your investing budget and have learned the basics, it's time to set your investing goal. Even though all investors are trying to make money, each one comes from a diverse background and has different needs. Safety of capital, income and capital appreciation are some factors to consider; what is best for you will depend on your age, position in life and personal circumstances. A 35-year-old business executive and a 75-year-old widow will have very different needs.

Read: Step 4: Determine Your Risk Tolerance
Step 4: Determine Your Risk Tolerance
Would a significant drop in your overall investment value make you weak in the knees? Before deciding on which investments are right for you, you need to know how much risk you are willing to assume. Do you love fast cars and the thrill of a risk, or do you prefer reading in your hammock while enjoying the safety of your backyard? Your risk tolerance will vary according to your age, income requirements and financial goals.

Step 5: Find Your Investing Style
Now that you know your risk tolerance and goals, what is your investing style? Many first-time investors will find that their goals and risk tolerance will often not match up. For example, if you love fast cars but are looking for safety of capital, you're better off taking a more conservative approach to investing. Conservative investors will generally invest 70-75% of their money in low-risk, fixed-income securities such as Treasury bills, with 15-20% dedicated to blue chip equities. On the other hand, very aggressive investors will generally invest 80-100% of their money in equities.

Step 6: Learn The Costs
It is equally important to learn the costs of investing, as certain costs can cut into your investment returns. As a whole, passive investing strategies tend to have lower fees than active investing strategies such as trading stocks. Stock brokers charge commissions. For investors starting out with a smaller investment, a discount broker is probably a better choice because they charge a reduced commission. On the other hand, if you are purchasing mutual funds, keep in mind that funds charge various management fees, which is the cost of operating the fund, and some funds charge load fees.

Step 7: Find A Broker Or Advisor
The type of advisor that is right for you depends on the amount of time you are willing to spend on your investments and your risk tolerance. Choosing a financial advisor is a big decision. Factors to consider include their reputation and performance, what designations they hold, how much they plan on communicating with you and what additional services they can offer.

Step 8: Choose Investments
Now comes the fun part: choosing the investments that will become a part of your investment portfolio. If you have a conservative investment style, your portfolio should consist mainly of low-risk, income-producing securities such as federal bonds and money market funds. Key concepts here are asset allocation and diversification. In asset allocation, you are balancing risk and reward by dividing your money between the three asset classes: equities, fixed-income and cash. By diversifying among different asset classes, you avoid the issues associated with putting all of your eggs in one basket.

Step 9: Keep Emotions At Bay
Don't let fear or greed limit your returns or inflate your losses. Expect short-term fluctuations in your overall portfolio value. As a long-term investor, these short-term movements should not cause panic. Greed can lead an investor to hold on to a position too long in the hope of an even higher price – even if it falls. Fear can cause an investor to sell an investment too early, or prevent an investor from selling a loser. If your portfolio is keeping you awake at night, it might be best to reconsider your risk tolerance and adopt a more conservative approach.

Step 10: Review and Adjust
The final step in your investing journey is reviewing your portfolio. Once you've established an asset-allocation strategy, you may find that your asset weightings have changed over the course of the year. Why? The market value of the various securities within your portfolio has changed. This can be modified easily through rebalancing.

10 Simple Steps To Financial Security Before 30

Below is an outline on how to reach financial security before 30 as recommended by Ken Hawkins.

1. Have Fun
Enjoy yourself while you are young - you will have plenty of time to be miserable when you are older. Living a successful, enjoyable and happy life is about achieving a proper balance between time with family and friends and between work and leisure time. Striking a proper balance between your life today and your future is also important. Financially, we can't live as if today was our last day. We have to decide between what we spend today versus what we spend in the future. Finding the correct balance is an important first step toward achieving financial security.

2. Recognize Your Most Important Financial Asset: Yourself
Your skills, knowledge and experience are the biggest asset you have. The value of your future earnings will dwarf any savings or investments you might have for most of your career. Your job and future career is the most important factor in achieving financial independence and security. For those just entering the work force, future career opportunities are as bright as they've ever been. The large number of retiring baby boomers is expected to create labor shortages. There will be room for advancement as companies scramble to fill the positions held by these aging baby boomers. Those who are in a position to take advantage of these opportunities will benefit the most.

Look at yourself as a financial asset. Investing in yourself will pay off in the future. Increase your value through hard work, continual upgrading of skills and knowledge, and making smart career choices. Efforts to improve your career can have a far bigger impact on your financial security than tightening your belt and trying to save more.

3. Become a Planner, Not a Saver
Research has shown that those who plan for the future end up with more wealth than those who do not. Successful people are goal oriented: they set goals and develop a plan to achieve them. For example, if you set a goal to pay off your student loans in two years, you'll have a better chance of achieving this goal than you would if you merely said you wanted to pay off your student loans, but failed to set a timetable.

Become a planner. Set goals and develop an action plan to reach them. Even the process of writing down some goals will help you to achieve them. Being goal oriented and following a plan means taking control of your life. It is an important step toward improving your financial independence and security.

4. Set Short-Term Goals - Long-Term Goals Will Take Care of Themselves
Life holds many uncertainties - and a lot can change between now and 30 years into the future. As such, the prospect of planning far into the future is a daunting task and in many ways, it's often an exercise in futility for young investors.

Rather than setting long-term goals, set a series of small short-term goals. These goals could be a simple as trying to pay off credit card debt or student loans in a matter of months. Maybe your goal is to contribute to your company's pension plan with a set salary reduction contribution each month. Setting short-term goals that will help you to advance in your career is important in helping you get ahead. Remember, these short-term goals should be measurable and precise. You can't win a race if there's no finish line.

As you achieve your short-term goals, set other short-term goals. Maybe you want to buy a house, earn a promotion at work or buy a new car. The constant setting and achieving of short-term goals will ensure that you reach your longer-term goals. If your goal is to be worth a million dollars by age 40, you cannot achieve this without first achieving smaller goals like having $10,000, $50,000 or $500,000.

5. Planning For Retirement: Fuggetaboutit?
Just out of school, retirement planning is the last thing on your mind. So, if you have to for now, just fuggetaboutit. If you follow the other tips, you will not only be more financially secure and prepared in the short term, but you will also be financially prepared for the distant future as well.

However, if you take a few steps now to start saving, like setting up automatic monthly contributions to a retirement plan like an employer-sponsored 401(k) or your own Roth IRA, compounding will work in your favor, which makes reaching your goal much easier.

If you implement this pay yourself first ideal, you won't have to worry about how much you're contributing; the most important thing is to develop the habit of saving. The rest will take care of itself. You can increase your contributions when your income rises or when you've achieved more of your short-term financial goals.

6. Make Sure Your Lifestyle Costs Lag Your Income Growth
Many new graduates find that in the first couple years of working they have excess cash flow. Still used to their more frugal student spending habits, it is easy to make more money than they need. Rather than using excess income to buy new toys and live a more luxurious lifestyle, this excess could be put toward reducing debt or adding to savings. As you advance in your career and attain greater responsibility, your salary should increase. If the cost of your lifestyle lags your income growth, you will always have excess cash flow that can be put toward paying down debt, making investments, saving for a home, or achieving any other financial goals you may have.

Where many people get into trouble is that they feel entitled to a standard of living that exceeds what they can afford. However, if you keep your standard of living below what you earn, you won't have to cut back to accumulate money; instead, you will naturally have excess cash flow because you earn more than you need to live on. In addition, keep in mind that trying to keep up with the Joneses is always a recipe for financial failure. For all you know, you may make more than the Joneses, who may be funding their lavish lifestyle with debt anyway.

The good life should be a reward for your hard work, good fortune and successful planning, not something that you are entitled to. Once you have established a certain lifestyle, it is psychologically difficult to lower it. It is very easy to raise it.

7. Become Financially Literate
Making money is one thing; saving it and making it grow is another. Financial management and investing are lifelong endeavors. Making sound financial and investment decisions is important for achieving your financial goals. The more knowledgeable and experienced you are in financial matters, the fewer mistakes you will make.

Research has shown that people who are financially literate end up with more wealth than those who are not. There is a strong monetary incentive for becoming financially sophisticated. Taking the time and effort to become knowledgeable in the areas of personal finance and investing will pay off throughout your life.

8. Seize the Opportunities: Take Calculated Risks
Taking calculated risks when you are young can be a prudent decision in the long run. You might make mistakes along the way, but remember, mistakes are the lessons of wisdom. You often learn more from your mistakes than from your successes. Also, when you are young, you can recover faster from financial mistakes, and you have many years to recover.

Examples of calculated risks might include moving to a new city with more job opportunities, going back to school for additional training or taking a new job at a different company for less pay but more upside potential. Starting a new company, working for a small startup company, or investing in high risk/high return stocks, is easier to do when you're young. Younger people can afford to take risk, and the same opportunities might not be available later in life. As people get older and assume more family responsibilities like paying off the mortgage or saving for the kids' education, many are forced to play it safe and are unable to capitalize on riskier opportunities that present themselves.

Taking calculated risks when you can afford to do so is necessary to get ahead financially. Playing it safe might be the bigger mistake in the long run.

9. Borrow Money For Investments - Never to Finance a Lifestyle
As mentioned before with the Joneses, you should never borrow to finance a lifestyle you cannot afford. Using credit for a life you feel entitled to is a losing proposition when it comes to building wealth. The constant borrowing will assure that there is no money available for investing, and the added interest expense of borrowing further increases the cost of the lifestyle.
Borrowing money should be used only for investing - where your gain will outrun your borrowing costs. This might mean investing in the literal sense (for stocks, bonds, etc.) or it might mean investing in yourself for your education, extra training, to start a business or to buy a house. In these cases, borrowing can provide the leverage you need to a reach your financial goals faster. Borrowing to meet short-term desires is counterproductive.

10. Take Advantage of Financial Freebies
Not many things in life are free. If you belong to a company pension plan, take the free money it offers and make sure that you contribute at least up to the maximum of what your company will match.

You can also look for (legal) ways to take advantage of tax laws. For example, contributing to an individual retirement account (IRA) will result in a tax savings - in effect, the government is giving you free money to provide an incentive to contribute. There is also an incentive to invest in stocks because of favorable tax treatment on capital gains and dividend income.

Conclusion
Achieving financial independence is a goal most people strive for. It is not necessarily easy, but it is achievable if you understand your priorities, set achievable goals and take the proper steps toward reaching them.


Ken Hawkins is a financial writer and vice president of Second Opinion Investor Services www.secondopinions.ca, an investment consulting firm that provides unbiased and independent investment advice. His experience spans the investment world of the private client investor as well as the world of the institutional investor representing pension funds, asset management companies, mutual funds and investment counselors. Hawkins is also co-author of "The New Rules for Retirement - What Your Financial Advisor Isn't Telling You" (2008).