Basics of money management in Forex trading
Money management (MM) - money management, one of the most important components of successful trading at any exchange in general and Forex in particular.
Many beginners do not pay attention to creation of MM system, most of them studying Forex analysis, they mainly develop and modify the rules of opening and closing deals, looking for the only one correct algorithm, hoping that it will become for them that very "grail", the good news is that now it is easy to download forex strategies in different variants.
Meanwhile, it is on how well a trader can manage their own deposit, not only the size of future profits, but also the staying of a player on the Forex market in general, depends.
Basic rules of money management in Forex trading
Several simple rules, based on the experience of practicing traders, allow any market participant to create his own system of Money Management, which, if not for financial well-being, helps to prevent many mistakes and losses of the deposit.
Securing a position
- When trading on Forex, it is necessary to use Stop Loss orders and preferably place Take Profit orders.
These orders fix profit and loss of a deal. Placing of these orders reduces the psychological burden on the trader.
Some traders consider using of Stop Loss order unnecessary as its triggering reduces the size of the deposit and prefer locking the loss position into a "lock" (Lokk).
However, in order to exit the "lock" correctly, one should have considerable experience in trading on the Forex market and, moreover, not all trading platforms existing today allow one to do so.
Therefore, it is extremely important for a beginner on the Forex market to place Stop Loss and Take Profit orders immediately at the moment of opening a trade.
This is the so-called "position protection" rule.
- There is a lot of controversy regarding how many points from the opening price the Stop Loss order should be set.
After the collapse of the financial market at the end of 2008 the volatility of many currency pairs has increased noticeably, and today it is advisable to set the Stop Loss at the level of 50-70 points to avoid premature order triggering as a result of "market noise".
It is better to set the Take Profit order, focusing on support-resistance levels, provided the work on the medium-term timeframes.
The ratio between the Stop Loss and Take Profit orders is not necessarily 1:2, because in this case the Take Profit level can be higher than the daily average price movement. Though, with experience, the trader will come to decision of how to set protective orders basing on the graphic patterns of price behavior. The Forex analysis will help to do it. Therefore, the trader will not make decisions relying on abstract figures of the distance to the protection in points, but on the trade situation.
But if at this point of his work the player can't determine the significant levels for placing protective orders, he better put them according to a fixed algorithm, moving the stop after the price at the interval of time and distance.
Limit the risks
- One of the basic rules of Money management is to limit risks to 10% of the deposit.
Choosing a currency pair and lot to trade with using the Forex graphical analysis, the trader should limit his amount so that in case of unfavorable situation he could not lose more than a tenth of his own capital.
- Many experienced traders use the practice of building up positions as prices move in the direction they require. But this requires experience and knowledge. In a forex strategy for beginners, it is better to take one profitable trade to its logical conclusion than to unsuccessfully enter additional lots, where you can trigger stops from wrong decisions to wipe out profits from the initial position.
Think positively in trading
- Another important factor in successful money management is a positive attitude.
You should never enter the market when you are in a bad mood, excited or intoxicated. Remember that if you are unlucky today and a trade seems to be losing, you should never try to win back. Forex is not a casino. If the trader has miscalculated the dynamics of the price movement, it means that he did not take into account something or made an incorrect analysis of Forex, and emotions and excitement can only aggravate the negative consequences.