Rule-based forex trading system means there shall be no guess works and proper discretion must be maintained for each and every trade by following certain rules which are already been set up. The rules must be simple and all the traders must understand the technicality of the rules. These rules are generally tough to make an outsider understand them. These rules are specific and not general and help one to understand all trading methods properly.
If you are discretionary trader you will use rule-based forex trading system but you will have the ability to be flat (sometimes you will not follow the rules) in correlation to the information that is accessible at the present time.
Many traders expect in the trading articles to read secret formulas, secret trading rules that will give them success if they follow those rules. Trading rules exist to help traders to avoid overtrading, to have edge and trading plan, increase the winning rate probability.
Rules of forex trading
Now, before moving into the rules and other things, one should follow for forex trading; let us understand the psychology behind it and some simple steps or rules one should follow for understanding the forex trading system.
1. SWOT analysis: Before doing anything, one must know themselves absolutely. Therefore, a SWOT analysis is extremely important in order to know your strengths, weaknesses, opportunities, and threats. Knowing these personality traits of yours will help you to figure out the trading measures and rules you should follow in order to rescue yourself from any monetary damages. This analysis will also prepare you mentally and emotionally, so that, you remain objective, disciplined and patient towards the tradings. Also, it helps you to have realistic expectations from the tradings done by you.
2. Goal settings: Setting a realistic goal is a tough and primary thing to do. So, you can keep a tab on your trading skills and rules. Now, financial goal setting means, sitting down with your calculator and understand the path to be taken to achieve a certain amount of financial returns from the investments you intend to do in near futures. This will also help you to understand the frequency of your investments. Also, do not forget to count some financial losses too in the trading system as we all know; investments are subject to market risks.
3. Financial status: Make sure you have a sufficient amount of cash for your regular tradings. Now, this means, you need to have enough not just for your investments but also for your daily uses and also have a sufficient amount of money saved with you for your future uses, in case of any occurrence of losses during the investments as the market remains very uncertain.
4. Selection of investments: Although, we know any kind of investment has a very high risk of losing money, saving and getting high returns from investments is always our goal. Therefore, the selection of a relatively harmonious market or investment is always important. In order to do that, choose a few currencies which relatively have lesser chances of value fall. Invest these chosen currencies in different time frames and markets for a few days to understand the movement of the in-flow and out-flow of the money. Repeat this process with other currencies as well to see what works best for you. Once you have your pair of currencies sorted, then, start reading and listening to news regarding the chosen pair of currencies and maintain a chart to understand the movement of the currencies better.
5. Testing methodology: Before jumping into the main pool, do test your methodology or system for some days by doing smaller and lesser investments of your selected currencies in the selected markets. This will give you a fair knowledge of whether your chosen method, market and currency are complementing each other or not. Sometimes, the support and resistance are not enough to turn back save yourself from a falling market, having said that, set and choose a system that can give an edge to your trading capabilities as well as is built with the concept of support and resistance.
6. Limit settings: Before starting with your forex investment, calculate and know your limit so that, you face minimum loss in case the market starts running against you. So, use the risk-to-reward formula to calculate and to set your investment limits. Now, after determining the limit, you also need to know how to stop your investments from facing losses. Always stop investing in a certain market at least 20 pips from the entry point of your investments. This process will make your investment into the standard-lot. But, in order to stop facing losses when your chosen market of investment is falling, you need to shift from the standard-lot to the mini-lot. Now, you will enter the mini-lot once you reduce the size and maintain a 2% risk-to-capital rule.
Now, in order to know out financial losses, you can also, prepare and maintain a market chart which will give you a fair idea of the movements in the market. Also, do investments into any market at least by keeping 25% of Daily Average true range (25% from Daily ATR) from the entry-level. This will ensure your 2:1 profit-to-loss ratio.
7. Dealing loss: Suppose, even after following every corner of the set rules and system, you tumble down the market slope, do not give up and be upset. We all he market is bouncy and maybe it was not your day or maybe you gave a wrong entry even after being diligent. Keep your patience and monitor the market fluctuations closely and then, head back into the market with better support and resistance.
These basic rules help traders to get an accurate idea of the investments and the net results. Thus, also helps one to do better money management. And in case any losses occur, then, recheck or change the technical indicators used to set the rules or the system. Often, people think by following a definite system there will be no occurrence of loss at all but if that would have been the true scenario then, traders would have been richer than their wildest dreams. So, obtaining and following a good trading system will only help you to follow your passion for trading without facing any monetary losses. You can modify some of the rules of the forex trading system in order to improvise and upgrade your skills in forex trading and tractions, once you become immensely successful and experienced in this field.