Forex and the preservation of Capital

The key to a successful trading career in the Forex, is being around long enough to make it happen. Eventually, all good traders learn this secret. If they don't, they are not good. And if they are not good, they won't be trading for long. At some point, if a trader's forex business does not become profitable on its own, that is to say, if his account is not growing by means of trading, he will stop. he will no longer feed money he has earned somewhere else into a proposition that just keeps sucking it all up.

Therefore, the number one rule in Forex trading is "Preserve Your Capital". If you don't keep your powder dry, you won't have anything with which to fight at all. There are a number of means of doing this, and you should experiment with them to see what best fits your trading psychology.

1. Don't take high risk trades. that seems like common sense, but it is very uncommon. what defines a risky trade (before it becomes a loss)? The reward to risk ratio. If the reward is much smaller than the risk, you will be a loser. You cannot constantly put on trades like that without the majority becoming losers. Make sure that at all times, you reward to risk is 2-to-1. Then, even at only winning 50% of your trades, you will be profitable.

2. Trade Less. I was never profitable until I practiced this rule. There may be some really successful scalpers in this world, but I don't know any of them that are retail traders. I will look forward to meeting one of them one day. But for now, trade off of longer term charts. The 4 hour and daily are fine. You will catch bigger moves, the stops will be so many pips that it will force you to trade with very low leverage (or else risk your entire account at one time), and the technical signals on these charts are far more successful.

3. On a daily basis, never let your biggest loser match your biggest winner. That's another way of saying "Cut your losses short, and let your winners run." I also mean don't just arbitrarily cut a trade loose, just because it is approaching a loss that is the size of your biggest win. Before you ever entered that losing trade, you should be able to assess the possible damage if your stop loss is hit. if it is equal to your last big trade, just let it go by. Exercise some discipline and just walk away.

4. When your trade is in the profit, move your stop to break even. We'll talk more about this next week, and I'll introduce you to a new indicator which I use to help set and manage my stops.

Happy Trading!

Bill