The Golden Rule of Forex Trading

Last week I was at a Bible study class and the priest there mentioned that Hillel, a famous rabbi was asked to sum up the Torah in one sentence and he said "Do not do to others what you would not want done to yourself." This sounds very much like the Golden Rule said by Confucius rather than by a rabbi. So in the same vein I would like to give you the Golden Rule of Forex Trading in just one sentence.

"Enter the market near the beginning of a trend after it has started and exit before it reverses or soon after." How does it sound? Very simple, right? And that's just what every trader will want to do but it is easier said than done. It is even simpler and more obvious on hindsight when you look at charts that have happened but try doing that during a live market.

So all the study of the charts and technical analysis is to enable one to make an early entry once a trend has started, wait for the trend to continue, the longer the better; and exit before the trend reverses or soon after the trend has reversed. Note that we are not trying to catch the trend when it first starts and exit at the highest (or lowest) point to harvest the maximum number of pips. This is call trying to catch the tops and bottoms and it is too difficult since we do not have a crystal ball to see when the trend will start and when it will end. It would be great if we can get just maybe 70% or 60% of the trend since we are depending mainly on lagging indicators which can only show the trend after it has started or reversed.

The Forex market will set traps along the way and the common ones are known as retracement and false breakout. A retracement is a price movement in the opposite direction after the trend has started, after which the price will continue in the direction of the trend. Depending on which point you enter the market and the stop loss set, you may be stopped out during a retracement. It is most frustrating to see the price continuing in the original direction again after you have been stopped out during a retracement and counting what could have been your profit.

A false breakout is a false trend so to speak. It looks as if a new trend is forming but after a while, the "trend' reverses and move back to where it was or even in the opposite direction. If you get stopped out in this case, it does not feel as bad as in the retracement since the stop loss prevented you from suffering a higher loss while in the other case, the stop loss prevented you from making a profit. It is because of this that there are some gurus who propose not setting a stop loss at all or set at some ridiculously high values. But for beginners, it is always a must to set a stop loss since you will be knowing before hand exactly how much your loss will be if the price moves against you and you can calculate you risk reward ratio from this. Most importantly, this will protect your capital in case you lose your internet connection for whatever reasons. And there can be many reasons.

So for newbies, the advice is always to trade with the trend or as they say, "the trend is your friend" and "trend till it bends". That's Forex trading in a nutshell. Looking at old charts and in hindsight, even a blind man can show you the trend; the challenge is how to identify a trend in the midst of the ongoing price action.

(By the way, what Hillel actually said was "What is hateful to you, don't do to others. This is the whole Torah; the rest is commentary." So this post is the whole Forex Trading and the rest will be commentary!)

Ronald Kwok
http://ronaldkwok.atomicblog.hop.clickbank.net/