My Personal Trading Rules

In forex trading (forex=foreign exchange) there are two risks involved. The first risk is the financial risk you run of loosing some or all your money from your trading capital. The second risk is the – per trade – risk on each individual trade itself. Is it a high risk trade or are all the ‘indications’ lined up and is the risk perceived as less high. Are you about to open a position against the dominant trend? Then you might assume that the risk is higher than if you would trade with the dominant trend.

The overall financial risk can be dealt with by
(1) setting guidelines/rules as to how much of a percentage of your trading capital you are willing to risk per trade (the per trade risk) and
(2) by defining a rule that states how much of a percentage of your trading account you are willing to risk adding up all open positions (risk total on all open positions at any specific moment).

My Personal Trading Rules

(1) I am willing to risk a maximum of 3% per trade. It does not mean that every trade has to be taken at 3% risk, but this is the maximum. I have configured my trading system in such a way that it is not possible to accidentally place a trade at a higher risk. I also cannot by default place trades without a stop loss protection on the trade.
(2) The total outstanding risk on all open positions (trades still running) will be a maximum of 10% of the trading capital. So, if I open a position with a 1% risk on that trade, I can consider several other trades and open additional other positions at the same time in different time frames and on different currency pairs.
(3) I only open positions and trade with a stop-loss. The stop-loss (SL) is there to protect my trading capital. When the SL value is reached, the position is automatically closed. Without it, I would consider myself completely lost and unprotected. Not protecting trades with a SL is one of the main reasons why so many traders loose all their money in their trading account. They are simply not protecting their trading capital. I will not open a trade first, then to go in and add the stop-loss after that. I might forget and will then be unprotected. I only place the order together with a stop-loss in one go. I never move the SL in the opposite direction to the position and I don’t work with what is called ‘mental’ stop-loss positions where you would actually be able to think over the SL position while in the trade but not having placed a real SL when opening the position. Once you are in a trade and have an open position, the emotional pressure is on and that is really not the time to take these kind of decisions.
(4) I close all positions on the Friday and do not trade over the weekend. I prefer to close all positions at the end of the trading day.

Dealing with Emotional Pressure

To deal with the emotional pressure of trading I have two rules. The first rule is that I only think in terms of trading units and not in terms of money lost or won while trading. In my case as a forex trader I think in terms of pips. Second, I prefer to refer to positions as either up or down which are emotionless words. I don’t use the loose or winning terms too often. When I am down on a position I will respond with something like „that’s interesting” and analyse the trade. The price-action method working with the candlesticks and validated with volume is an analytical method. I only trade when I feel good and have the peace of mind to look at the trade opportunities with this analytical perspective. Once I enter the trade, I might use a set-and-forget method. Either I am stopped out at the SL or the trade runs and profit is taken at the TP (take profit) position. Once I am in the trade, this is all done automatically and I prefer it that way to keep the emotions away from the trading session as much as possible. When scalping (trading in shorter term timeframes like on the 5 minute chart) I will monitor the trade from beginning to end.

Expected Financial Return from Forex Trading

What is the financial return you can expect from trading forex? It all depends and to be honest, I really don’t know what you can do. If you are serious about trading foreign exchange and focus on Price-Action-Trading (PAT) validating the trading opportunities with volume (VPA = volume-price-analysis) and follow a solid trading plan, you should be able to make 7-20% per month. If you do not take the gains out of your trading account, you could more than double your capital each year.

Below you can calculate your capital increase. For example, if you start with 100.000 euro/US$ and make a return of 10% average per month and leave the money in your trading account and continue to trade for 3 years, you can see how that could add up to. Enter for example “100000” as present value, “10” as interest rate percentage per period (monthly period) and “36” for the number of periods (3 years) to find out that your 100.000 euro/US$ initial investment can be turned into more than 3 million in just 3 years. Another example, start with 500.000 and take 15% of return per month as your basis for 3 years (input = 36 periods) and see what kind of money you can earn from trading forex. However, since over 90% of those starting out trading forex wipe out their complete trading account within the first 100 trades, I hope you understand that there is no guarantee that you will make the same.

 

My Seven Trading Steps

Step 1

Check the general and financial news to see if there are any upcoming news events that could influence any potential or running trade. I start the day with reading some of the financial newspapers such as the Financial Times. You can look at the financial news at websites such as Forex Factory or Daily FX as well. On that last site you often also find the Daily FX TV channel with a daily analysis from an analist. Another good source of news is Money.net.

Since I use FX Synergy to place orders and manage my position sizes, I use FX Synergy to inform me about upcoming news events during the day directly from my trade management application. FX Synergy delivers me news alerts and they get these loaded from Forex Factory into the FX Synergy application. I am looking particularly at the major news events and their potential impact. I am not trading the news directly at the moment of release, which means that on longer trades I might stay in, but when considering a shorter timeframe trade, I will wait for the news event to pass by. Just recently I started trying out the ‘News Sniper’ strategy. See my blogpost ‘Breakfast with the traders” for more on this strategy. I might also check the Oanda volatility chart to find out in which currency-pairs there is the most volatility. Forex Factory and its associated information inside FX Synergy tell me about news event coming up. Money.net gives me a lot more background information on what is happening in the financial markets.

Step 2

After checking the news, I will go to the Currency Strength Indicator (CSI) in MetaTrader 4 (MT4) to look for potential trade setups and if there are e.g. any currencies in the overstretched regions and either being overbought or oversold. I will look at different timeframes and always include the daily outlook as well. Next I will look at the USD Index to see how strong the US$ is at the moment and if needed have a look at the Yen index as well. Then I will move on to price charts to study potential trade setups in more detail.

Step 3

When I have decided to have a closer look at a few currencypairs that interest me, I look over the charts at different timeframes. I only use candlestick charts and use the price-action or candlestick technique validated by volume as my main tool in spotting trading opportunities. I do use support and resistance and the 200EMA (200 exponential moving average) lines to help me spot where to potentially enter and exit a trade, set the SL and where to potentially take the profit (TP). I am looking for oversold or overbought currencies and currencypairs as well as currencypairs where one currency is gaining in strength against another weakening. I always look at a lower and a higher timeframe plus the daily when considering a trade.

Step 4

I am using candlestick trading, which is price-action trading, as my primary method of finding profitable trades. As the forex market is manipulated, I use volume to validate the price action.

Step 5

As a next step I wll quantify the risk on the trade itself answering the following questions:

• Are all indicators such as the CSI, the Currency Matrix, the Dollar Index, etc. in line or contradicting?
• Did I look at different time frames and does this still confirm the trade potential? At least I will look at the one time chart just below and above the chart in which I might want to trade as well as the daily (on the faster time charts that is).
• Are the support/resistance and 200EMA lines in the way or helping out in a possible trade entry?
• Would I be trading with or against the dominant trend? The dominant trend can be found on the slower time charts and e.g. the daily chart.
• Is there a price-pattern on the chart that clears the way to open a trade and if the volume validating the move?

Then I will doublecheck again the Currency Strength Indicator (indicator) for a last confirmation and quantify the risk taken on the postion and the time in the market as either a high risk or low risk potential trade. With a higher risk potential trade, I will stay with the shorter timeframes to watch the trade more closely. I might be looking primarily at the 5 minute chart, looking at the faster 1 minute chart on the one hand and the 30 minute and 1 hour charts on the other hand. By looking at the other timeframes I broaden my perspective on the trade potential by seeing the bigger picture.

Step 6

If all is setup and still confirming, I will get in always with a stop-loss and possibly a TP position. For managing positions I use FX Synergy. It is here that I set the SL and TP values and enter a trade. I never move the SL in the opposite direction to the position and consider S&R lines as well as the 200MA in setting up the trade. I do regularly use trailing SL orders. However, prices hardly ever move in one direction in one continuous move. In most cases I will be placing a fixed SL/TP order. As said earlier, I never move the SL in the opposite direction to the position. However, I can and sometimes do move the SL with the position to secure any profit along the way. Especially when I am scalping and trading intraday in the shorter time-frames I will continue to watch and monitor the trade and might secure any profit along the way or close the trade early when it moves against me. FX Synergy will manage the risk for me, but I will always check the order once it is in position to make sure. In fact, I have configured FX Synergy so that I simply cannot place an order without a SL. It will simply not accept it. This forces me to place the order with the SL in place. I also cannot enter an order with a larger risk than 2%.

Step 7

The final step for me is to get out of the trade. I prefer to do this on the longer timeframe trades by setting up the trade with a fixed TP and then to forget the trade. This set-and-forget approach results in me analysing the trade using the above mentioned techniques of price-action validated with volume. Once I have an open position emotions start to play a role and I prefer to let the position be either stopped out or hit the TP (take-profit) target. If I do see that the trade is in profit, I often move the SL to the entry position or a few pips above. This way I cannot loose on this trade anymore. On shorter timeframes and especially when the trade is also against the dominant trend, I might monitor the trade closely and use the same techniques I use to get into a position to also get me out. I will look at the CSI to give me an indication on direction of the currency in several time frames as well as at the volume to get an idea of when the „steam” is off or might be building up. Based on this information I might let the profit run longer or decide to close the position at the predefined TP value.

Making money trading forex is all about cutting your losses short and letting your profits run. With these 7 steps and the rules as outlined above I approach the market each day of the working week with confidence.

 

* Risk Disclaimer