The Basics of Trading: The Nuts and Bolts

Filed under: Learn Forex Trading |

Screen shot 2013-02-05 at 10.37.35There are many different systems and methodologies of trading depending on your personality and trading style. But there are certain elements that all good systems have in common, and I would like to talk you through some of these nuts and bolts of trading right now.

 

To begin with, all successful traders have a good system of money management. This means that you have a certain amount of money (or ‘trading capital’) set aside for trading only, and that you can afford to lose this money without it having any negative implications for your life. So, you might have inherited some money for example that you were not expecting. What it should not be is money that you need to pay the mortgage!

 

Once you have a trading bank, you need to think about your risk levels. A good rule of thumb is to never risk more than 2% of your bank on any one trade, with 1% or even 0.5% being more conservative. You also need to choose a good broker with competitive spreads, and get a good computer to trade from.

 

Once you have got all of these nuts and bolts needed for a successful trading system or methodology, you can start to think about the more advanced elements of your approach. What is the minimum risk-reward scenario that you are willing to take? I personally never take on a trade that does not allow for a profit of at least two times my risk. This means that even a 50-50-success rate on trades will be very profitable. You also need to decide on your entry signal, and whether you will modify your trades once they are in play, or whether you will operate a set and forget type strategy. You need to decide on this, and much more, before you even think about trading on a live account.

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