Forex
Day Trading Rules:
Why Mental Equity Can Make You Or Destroy You
If you are looking for day trading rules, pay attention to two key guidelines revealed in this article. Ignoring them can destroy your chances of becoming a successful trader.
On the other hand, adding them to your day trading rules list will greatly increase the probability you will become a highly profitable trader.
Account Equity
Forex day trading rules often revolve around techniques, technical indicators, and equity management. All these are of course important.
Without proper equity management new traders are tempted to take risks far out of proportion to the amount of equity they have in their account.
Many seasoned traders recommend not risking more than 2% of your capital on any single trade. Some say 1% or even less. In this way you can have a string of losing trades and still be able to survive to see another day.
Mental & Emotional Equity
Of equal importance however is proper mental and emotional management. Day trading can be an exhausting business. The day trader can experience the full gamut of human emotions in a very limited time, from the heights of elation to the depths of despair.
As traders grow with experience they learn to keep their emotions in check and maintain a disciplined approach.
This is where mental equity management comes in. A setup may appear that seems just right. We haven’t see much all day and we are anxious to trade. We want a little excitement. True, it isn’t the best entry point but we don’t want to miss the boat so we get in quickly using a market order.
The trade doesn’t even get into profit. For the next couple of hours it fluctuates in a range, but we are on the wrong side of the range. We watch the trading platform show -4 pips, -10 pips, -7 pips, -13 pips and so on.
What is happening to our mental and emotional state? If we are not very disciplined it starts to get drained. If you repeat this scenario frequently when you trade your mental bank will be so exhausted you will not be able to give trading the concentration it needs.
Preserving Your Mental Equity
On the other hand, after patiently waiting for price to reach the optimum entry point you had calculated, your trade is taken in and again goes into a dealing range. But now as you watch the trading platform it shows 2 pips, 8 pips, 4 pips, 11 pips. Now how do you feel? Much more relaxed, your mental capital is preserved.
On top of that, how are you affected when you see your account balance go down after 1 trade? Now imagine how you will feel if you have 10 losing trades in a row? When you look at your account balance then how will you feel about your next trade? Nervous? Obviously.
That’s why equity management is so crucial – risk no more than 2% on any trade. It’s also crucial because of the effect it can have on your mental bank account. Make the 2% level one of your day trading rules.
Additionally, if you are compiling your own day trading rules list, make sure you add this one: Never enter a trade once it has passed the optimum entry point. Sit on your hands and wait for the next time because it will surely come.
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