Successfull Trading Rules - By: Lyndsay Wilkinson

As a successful Trader and having spoken to many other successful traders I noticed that we had many ideas in common. We all had rules that we followed and believed to be necessary to remain successful.

Successfull Trading Rules:

#1 Rule :"Risk Reward Ratio"

Basically what I mean is dont take a large risk to make a very small profit. Understanding your risk/reward ratio is very important (the risk compared to how much reward (profit) you will make).An example of a trade with a 4:1 risk reward is if you have a stop in place so the maximum you could lose (risk) is $1000 and your limit order allows for a profit (reward) of $4000.

Always consider the risk reward factor before placing a trade. Most good traders would look at a 2:1 ratio, your potential profit being twice your potential loss. When working out your trading always take the spread into consideration, where you place a stop and where you place an exit order. Working out your risk reward ratio is a simple formula. I will give you an example.

Currency Pair EUR/USD. Buying # 1 lot Entry price 1.3330 Stop 1.3310 Target 1.3372 Loss 20 pips Profit 40 pips (net after spread of 2) Ratio 2:1

If the system you are using indicates where the entry and exit points are and a ratio of 1.5:1 is not realistic it is better not to take the trade and wait for the next opportunity.

#2 :"Always Trade with a Stop Loss"

Before you place a Trade it is important to realize that even with a winning system you WILL have LOSING Trades. The decision on when to close the Trade must be made before you place your Trade, it can then be made without emotion and it will be easier to stick with your Plan (This is a must).The idea is to gain Maximum Profit and Minimize your Loss.

When you place an order you can manually select when the trade is going to end. To do this you state how far you will let the trade run at a loss before the trade ends. This is called a "Stop Loss Order". Basically this means if the trade goes against you, you can control your loss. This is a common way to safe guard against heavy losses.

There is always a down side to using stop loss orders. It is too easy to focus on reducing your possible losses so if there is a small change in the direction of your trade you will be cut out with a small loss and you will also be charged the spread, often the trade changes back to the direction you had anticipated which then runs on and would have given a nice profit.

If you are trading in short time frames and finding yourself being stopped out after small losses you will be surprised at how quickly the broker's cost (spread) can mount up over a month. Therefore it is extremely important to either use a system that will guide you where to place your stop loss or to understand exactly where to place your "Stop Loss" and the consequences of it. Sometimes allowing for a slightly larger loss before being stopped out will give you more successful results.

Some of the systems being offered are suggesting that you dont use a stop loss to prevent the frustrating situation when you are stopped out and the trade changes quickly back and goes on to offer hugh pip gains. This alternative can wipe out your margin and I would not suggest it unless you have a very large margin and you are prepared to monitor the trade and wait if the trade goes against you. AS I say not the way I would suggest.

Every trader has to have an individual strategy and rules they are prepared to stay with. Today there are software programs you can buy that will assist you with these decisions.

I hope you found this information helpful and I wish you good luck with your trading