Money Management in the Forex Market
We must accept the fact that success in Forex trading It is not the trader's skill to understand the market situation correctly, but his ability to manage trading capital that determines it. It is possible that in one month a trader will have 7 profitable trades and 3 losing trades, but in the meantime the deposit will be in a sad state compared to the initial one.
If the trader clearly follows the rules of money management (MM) and signals his trading strategyIf you have 4 profitable trades and 6 negative ones, the deposit can increase by the end of the month.
Ideally, each trader should develop money management rules for themselves, taking into account their priorities, risk appetite, etc. These rules should be an integral part of the trading strategy. To follow them, you need persistence and time, and a good mentor, a mentor who will be there to tell you how to act and teach you the tricks of the trade. It is difficult to find a specialist, given the level of fraud on the Web. You have to use only verified resources and time-tested brokers, such as AMarkets. This company has been on the market for more than a year, and has long been engaged in educational activities, easily teaching beginner traders.
There are key rules of money management, adhering to which it will not be possible to become a millionaire at once, but you can save the deposit and continue to trade. Let's consider them in detail.
I don't want to: pros and cons of stop orders
It is always necessary to put protective orders. At the same time the size of take profit should be at least twice the size of stop loss. If the number of profitable and unprofitable operations is equal, then as a result the mathematical expectation of profit tends to the trader's side. You should not move the set stop-loss order in any case in the direction of increasing losses.
If trading is carried out without stops, the psychological load on the trader is greatly increased. This statement is especially important if the amount of leverage is large. The more leverage is used, the greater is the risk that insignificant quotation changes will lead to significant losses and can even lead to the loss of the deposit. Thus, the relevance of using stop-losses increases.
Basically, all beginners step on the same rake: a trade is opened without protective orders, in the hope that it will be closed manually if necessary. But when the price does not go in the right direction, beginners often decide to wait, expecting the quotes to turn around. It is not difficult to guess that such decision in the overwhelming majority of cases leads to serious losses.
2. The ratio of risk to profit: keeping in mind
As George Soros said, "Start small. If things go well, build up a big position."
The great financier is one hundred percent right. Forex trading is not a sprint, but a marathon, and the winner is the one who takes his time and correctly calculates his risks. Speaking of risks, the classic risk/profit ratio is 1:2, i.e. the trader risks $200 while expecting to make $400 profit. This option combines money management and takes into account the interests of the strategy.
Note that the 1:2 ratio is deliberate. With losses it is possible to recoup losses in the next trading operation, if it is profitable. In addition, the risk/profit ratio of 1:2 will also allow you to slowly recover losses, as demonstrated in the table, where as the starting capital took the amount of $10000, compliance with the trading strategy with a win rate of more than 50%.
You can see in the table above that a strategy with a 50% win rate provides a profit of $500 when a risk/profit setting of 1:2 is used. Even with a small increase in risk/profit, for example 1:2.5, you can get more profit, even if the TS expects a profit of 50%. Thus, we can say that this option works.
For a stable profit, you can also take advantage of Cayman indicatorwhich is designed Forex broker AMarkets (demo account) and helps traders to trade against the crowd and stay more in the plus than in the minus. Thus, the win rate increases many times over.
3. small leverage to be
The use of high leverage is fraught with serious losses. Recall how four years ago the Bank of Switzerland did not support the franc, reducing the interest rate to an unbelievable level. And those traders who used high leverage in their work recorded colossal losses. This is the reason why we must remember that high leverage carries also a high risk.
4. Choosing the right trading tools
Most traders choose a currency instrument for trading at random and do not think about the fact that the random choice of an asset for trading is fraught with negative consequences, especially in terms of money management rules. For example, trading on exotic currency pairs, where spreads are usually about 50 pips or more, can result in losing your entire deposit.
At the same time, if you choose more liquid and popular currency pairs with small spreads, it will give a trader the opportunity to manage his resources better. In other words, if a trader wishes to make a profit of 1000 pips on a currency pair with a spread of $50, it is much more dangerous than pursuing the goal of 1000 pips, where the spread is 5 pips.
5. If you want to succeed, set realistic goals
The main reason that money management rules are not followed is emotion. During trading, emotions can take the upper hand over reason. Sometimes traders set themselves unrealizable tasks, for example, trying to get back 20% of investment in a short period of time at a loss.
Of course, this task is quite feasible, but only for professional traders who have a solid deposit size and extensive experience. In this regard, you should control your emotions and set specific goals for the day, week, month, etc.
It should be remembered that all of the above should be observed in each transaction. If the rules of MM will be observed, it will be possible to protect your deposit from serious drawdowns and, more importantly, from the loss.
Trading is like Formula 1
Managing capital is like piloting a Formula 1 car as it races around a track. What happens if the driver stops steering the car? That's right, the car will be wrecked. It's the same in forex, if you don't manage your capital, ruin is inevitable. It is amazing that everybody understands how important it is to drive a car on the racetrack, but only a few realize the importance of money management in trading.
Many people try their hand at the Forex market, hoping that they can get rich quickly and easily. But only those who have understood the seriousness of trading and studied the rules of money management can steadily earn on Forex. Others just suffer failure after failure, hoping for a miracle, and then leave it, calling forex is a scamwithout ever admitting his mistakes.