Defensively. In football terms, "the
most important rule is to play defense, not offense". Think
about what you could lose as
opposed to what you could gain. Anticipate the "what
ifs" and plan ahead, rather than have to react after the
fact. To trade defensively, assume that the market is going to go against you.
Calculate your maximum possible drawdown. Adjust your stop points, if necessary,
to where you're comfortable. Develop a plan to get out of the market. Then if
the market moves against you, you are prepared. Protect
what you have.
Develop a trading plan and adhere to it. Every trader should develop a personal methodology for trading. The methodology, or trading model, maybe based on fundamental factors, technical indicators or a combination. Before you commit funds in the market, get some evidence that your trading methodology is sound and profitable. An important part of your trading plan is to set a limit on what you are willing to lose. If you reach that limit. GET OUT. Stick to your trading plan and avoid impulse trades. If you don't follow your plan, you have no plan. A sound trading plan will also give you needed confidence under pressure. With specific guidelines to follow, you will also be less likely to trade impulsively. Do not follow a trading plan blindly, however. If you do not understand what the market is doing or if your emotional equilibrium is severely disturbed, then close out all positions. In developing your trading strategy, don't invest on the basis of market tips or rumors. It is your money that will be at risk. Before you trade, do your homework.
Control Your Emotions. Recognize that all traders experience high levels of stress and suffer losses from time to time. Anxiety, frustration, depression and at times desperation, are all part of the trading game. Part of risk management is the ability to control these emotions. Don't let these emotions take control of your trading. Stay focused on what you are doing. Trade on the basis of informed, rational decisions, not emotions and wishful thinking. Taking an occasional day off may help you reduce stress and maintain a positive attitude. If you have been doing well, it is a well-deserved reward. If you have doing poorly, the break help you avoid battle fatigue and may help you see the market with a different perspective. A local stress management program may also provide important help.
If in doubt, Get out. Personal doubts indicate that something is wrong with your game plan. Get out of the market quick if: 1) you don't know what to do 2) you can't sleep at night.
Know Yourself. You need an objective temperament, an ability to control emotions, and to carry a position without losing sleep. Although trading discipline can be developed the successful trader appears to be unemotional about their positions. There are many exciting things happening in the market everyday, so it takes a hard-nosed type of attitude and an ability to stand above short term circumstances, or you'll be changing your mind and your position every few minutes.
Don't Over Commit. One rule of thumb is to keep at least two times the money in your margin accounts that is needed for a particular position. Reduce your position, if necessary, to conform to that rule. This rule helps you avoid trading decisions based on the amount of money in your margin account.
Isolate your Trading from your Desired Profits. Don't hope for a move so much that your trade is based on HOPE. Although hope is a great virtue in other areas of life, it can be a great hindrance to a trader. When hoping that the market will turn around their favor, speculators often violate basic trading rules.
Form New Opinions During trading Hours. Decide on a basic course of
action, don't let the ups and downs during the day upset your trading plan.
Decisions made during the trading day based on the price movement or news item
are usually disastrous. Formulate a basic trading plan before the market opens
or before opening a trade, then look for a proper time to execute the decision
that has been made.
Take a Trading Break. One successful trader commented. "When I fall to 90% of mental efficiency, I began to break even. Anything below that I begin to lose." A trading breaks helps you take detached view if the markets, and tends to give a fresh look at yourself and the way you want to trade for the next several weeks.
Don't Follow the Crowd. When everyone seems to be long, they took for a reason to be short. When most of the advisory services are long, for example, the successful trader gets ready to move to the sideline or to take a short position.
Block Out Other Opinion. Don't be influenced in your trading by what someone says, or you will continually change your mind. If you listen to these outside views, you may be tempted to change your mind only to find later than holding your own opinion would have been more profitable.
Don't trade too Many Currencies at Once. You'll hurt yourself if you try to have the necessary information and "feel" of several markets. Learn to know your limitations, and trade within these limits.
Never Add to a Losing Position. Regardless of how confident you fell, if you establish a position that shows a loss, don't add to it.
Cut Your Losses Short. When the market moves against you admit your mistake by liquidating your position. You can still be successful even if you are right on only 50% of your trades if you keep your losses short and let your profits run. One of the most common failures of new traders is their ability to admit they're wrong. It takes a great deal of discipline to overcome the temptation to hang on a loss, hoping that the market will turn in your favor.
Let Profit Run. Successful traders say you should never take a profit just for the sake of taking a profit--have a reason to close out a profitable position.
Be Patient with Losing Position. Never carry a losing position over two or three days, and never over a weekend. This is what you called forced-discipline. Although it sounds very simple to say "cut your losses short"; it's a tough area even for seasoned traders.
Learn to Like Losses. Traders must learn to like losses because they are part of the business. When you gain the emotional stability to accept a loss without hurting your pride, you are on your way to becoming successful speculator. The fear taking a loss must be first removed in order to become a good trader.
Use Stop Orders Cautiously. Stop loss helps you cut your losses short. An important factor is to determined your stop loss point when place your order. Remember that stop loss should be used with great discretion because stops that are placed too tight can put you out of the market with a loss very quickly. You can become "whipsawed" by poor placement of stops.
Buy Bullish News Sell the Facts. If market rumors are bullish, then you should buy on the news. But when the news reports turn into reality, then it is time to "sell the facts."
Look for Good Odds. Look for opportunities where the loss potential is small in relation to the profit potential is small in relation to the profit potential. Watching trading ranges over a year or several years helps you have perspective to determine the odds. Market fundamentals are also helpful in determining the "high-odd" situation.
Always Take Windfall Profits. Sometimes you take a position and after a short while you have more profits than you ever expected. Rather than watching the market a while longer trying to figure out why the profits came so fast, "take quick profits and run."
Act Promptly. The futures market is not kind to those who procrastinate. Therefore, the rule of thumb is Act Promptly. This doesn't mean that you should be impulsive, but if your judgement says you should liquidate a position, do it immediately.
Don't Reverse Your Position. When your position is at a loss and you decide to get out, don't make a 180-degree turn. If you reverse your position outright you might get whipsawed losing as the market goes down, then losing more as the market goes up.
Know the Price Trend. You can identify major markets trends by using charts. It helps costly errors of buying and selling decisions.
Use the Halfway Rule in Picking Buy or Sell spots. This means finding out over what range the currency has been trading, and then buying at the lower half of that range, or selling at the upper half. This rule is particularly useful in trading in a situation where the market is trading within the channel.