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The Four Rules of Safe Trading

I remember the time my dad took me to the bank to help me open my first savings account, to teach me the importance of saving my money. At the time, 6% a year of compounding interest seemed better than nothing… but nowadays, most people would jump in droves for a return like that.

Such a return, though, is simply not enough. With the rising cost of living and Murphy’s Law constantly being enforced, we need a much larger buffer for our future. Who knows if there will be such a thing as Social Security when it is our turn to retire? We have the responsibility of taking command of our fiscal future. Rather than be at the mercy of the stingy banking institution, many turn to trading stocks or the forex.

If you are new to trading, you may be a little nervous about getting started. Below are some pointers and principles to remember. Learn them now, or learn them later. Obviously, it’s far better to learn from other’s mistakes and experience rather of your own.

You Can Lose Your Shirt

Perhaps this one is obvious, but you would be surprised how many ignore the cardinal rule of trading: trade only with money you can afford to lose. The ignorant will usually end up nothing if they’re not careful. Seriously, if you can’t take a match to a dollar bill without freaking out, you should just stick that dollar in a savings account, bond, or mutual fund.

Please, be smart. With the potential of exceptional returns comes the even greater likelihood that you will lose, if you don’t know what you’re doing… especially with the foreign exchange. If you’re not careful, it’s not just your shirt you’ll lose.

Throwing Caution to the Wind = Throwing Money to the Wind

The worst thing that can happen to a new trader is at he has a chain of consecutive winning trades. When this happens, the tendency is for your head to double in size as you take all the credit on a heads-or-tails market entry. Do this a couple times and it’s the setup for the perfect financial storm.

“Buy high, sell low” is not the best strategy. Don’t ever make a trade without knowing why you feel that this is a good trade. Be able to justify every trade before pulling the trigger. Never enter a trade without a clear entry and exit strategy.

Murphy Is the Devil

No matter how gifted you might think you might be, no one is exempt from Murphy’s Law. Your trade can go south at any time. So always, always employ stops in your strategies to minimize losses when the market suddenly goes haywire on you, because eventually it can and probably will.

All In, All Over

One of the biggest factors that separate the men from the boys on the trading floor is the money management strategy (or lack thereof) that the trader chooses… And one of the biggest mistakes that traders make is overtrading.

Always be deliberate as to the size of your position in a trade. Put a strict limit on how much of your balance you will use at any given time. It is critical that you have a large enough balance in reserve. Doing so gives you staying power to survive bad streaks long enough to recover with a good trade here and there. Go “all in” for that one big trade that’s going to set you for life and you might quickly find yourself “all out” if you’re wrong. Don’t forget… Murphy is the Devil.

I hope that these tips will help you to start your trading journey on the right foot. Be deliberate with each trading step. While there is great risk in trading, if you’re smart and follow the rules, there is also the potential for great reward.

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Posted on

February 11, 2024