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Top 7 Forex Trading Rules For Beginners 

Last Updated: January 21, 2021

By Rayner Teo

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In today’s episode, you’ll discover the top 7 forex trading rules for beginners.

So tune in right now…

Resources

Trend Following Trading Strategy Guide

Forex Risk Management and Position Sizing (The Complete Guide)

The Complete Guide to Stop Loss Order

How to Create a Trading Journal and Find Your Edge in the Markets

Transcript

Hey, hey, what’s up my friend? In today’s episode, I want to talk about the top 7 forex trading rules for beginners.

1. Trade on your timeframe

What I mean by this if you’re a forex trader, then there’s almost a lot of timeframes that you can look at, the 5-minute, 15-minute, 30-minute, 1-hour, 4-hour daily, weekly, or even monthly timeframe.

Here’s the thing, if you don’t define the timeframe that you’re going to trade then you’re going to be all over the place. You’ll be in the 5-minute, 30-minute, 4-hour or daily timeframe to look for trading setups. You’ll end up with analysis paralysis.

For instance, the daily timeframe could be in an uptrend but on the 15-minute timeframe, it’s a downtrend. Which timeframes should you follow, the 15-minute or the daily?

Once you can define your timeframe and stick to that, you’ll just trade your timeframe and ignore everything else. Things will become more clear cut. Because you’ll only focus on what’s relevant to your trading timeframe and the rest is just noise.

Trade your timeframe and ignore everything else.

2. Don’t follow forex signal services

When someone says buy EUR/USD with 50 pips stop loss and 100 PIP target, don’t do that because when you put your trading in the hands of someone else, then you’ll never pick up the skill of trading.

Also, when that strategy goes into a drawdown or a series of losses, I can guarantee you that you’ll lose the conviction to follow that person because you’re unsure, “Man has this trading strategy stopped working? What’s going on?”

You’ll have all these conflicting thoughts in your head. So don’t follow signal service, they don’t help you in your trading career.

3. Don’t use fixed lot sizes

This is a mistake many traders also make because it’s convenient to simply risk 1 mini lot on each trade because it’s easy to put that quantity into the MT4 platform for example.

But the problem with this is that different currency pairs have different volatility. If you compare the volatility of USD/JPY to USD/CAD, they’ll be different. On top of that, different pairs’ pip values are different as well.

If for instance, you use a fixed 1 mini lot on each trade, then sometimes your losses might be $200, sometimes it may be $1,000. But you won’t be sure why that is the case.

Well, that’s because you’re using a fixed lot size for different pairs with different volatility and different pip values.

4. Set your stop loss away from the price structure

Whenever you place a stop loss in the forex or the stock market, you want to set it at a level which invalidates your trading setup. It has to be set at a level where the market has difficulty reaching your stop loss.

If you’re in a long trade and you buy because there’s a bullish setup, then your stop loss has to be at a level where the price has difficulty hitting.

Your stop loss could be below support as it’s an area where potential buying pressure could step in to push the price higher. So you’ll want to set your stop loss a distance away from support.

This way, the market has to first break support, before it reaches your stop loss. You have to make the market work hard to reach your stop loss. Can you see where I’m coming from?

This concept can be applied to forex, stocks, etc. You can apply it on different timeframes as well. Basically, you want to identify the nearest price structure and then set your stop loss away from it.

The price structure could be something as simple as support, an upward trendline, a moving average that the market respects. Set your stop loss away from the price structure, so that the market needs to work harder to reach your stop loss.

This way, you will be able to stay in your trade longer and not get stopped out unnecessarily during a random whipsaw.

5. Follow the price

This is again, just a rule of thumb, regardless whether you trade stocks, FX or whatsoever – follow the price.

If the market is heading higher over time, then look for buying opportunities. Don’t try to act smart, “Oh the market is too high, it can’t go any higher! It’s coming to resistance and it must come down lower, let me sell!”

No, that shouldn’t be your thought process. Your thought process should be, “I know that the market is going up, I should look for buying opportunities.” Or, “Since the market is heading down, I’ll look for selling opportunities.” That is as simple as it should be.

But the funny thing is, the longer we trade, the more we complicate things. We add in fundamentals, we add in multiple timeframe analysis, we add in all these conflicting information only to end up doing things that shouldn’t be done.

6. Have a trading plan

What is a trading plan? A trading plan is something that simply tells you exactly:

  • When to enter and exit a trade
  • How to manage a trade if it moves in your favour
  • How to manage the trade if it moves against you
  • Which markets to trade
  • Which timeframes to trade

This is a plan which covers everything from A to Z. Because once you’re trading with the plan, then there’s no more guessing nor subjectivity because you know ahead of time what you need to do, every single time.

And it’s powerful because it gives you the confidence to put on a trade knowing that whatever happens, you are in control. Compared to, following a signal service where you don’t know what’s going to happen, who that person is, etc.

Having a trading plan puts you in the driver’s seat, you’re in control.

7. Trading rules are meant to be broken

I know that sounds ironic because I’ve just fed you the top six trading rules and number 7 tells me that all the above rules are meant to be broken? Yes. And let me explain why.

It’s because context matters. For example, some people say, to make money in financial markets, you have to buy low and sell high. I know that sounds right. But hey, who says you can’t buy high and sell higher too?

Yes, you can as well, especially for momentum traders. The rules are there to guide you. But once you understand the principle behind those rules, then you can even tweak those rules to suit your circumstance.

Here’s another example, you might have heard of things like, “Never average into your losses”. That’s again, a pretty common rule that I’ve shared a few times in a few episodes.

At the same time, for experienced traders, if they know that the area of support is pretty large, they can average into their losses because they’re buying at an even cheaper price each time.

But that must be done correctly with proper risk management, where if the price goes into support too much until it’s broken, they’ll eventually have to cut their losses and close that trade.

So, as I’ve mentioned you’ve got to understand the principle behind the rules, then only then can you bend or tweak the rules.

With that said, let’s do a quick recap…

Recap

  1. Trade your timeframe
  2. Don’t follow a signal service
  3. Don’t use fixed lot sizes
  4. Set your stop loss away from the price structure
  5. Follow the price
  6. Have a trading plan
  7. Rules are meant to be broken

With that said, I wish you good luck and good trading. I will talk to you soon.

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