Money Management Methods on the Forex Market
Successful trading on the Forex market includes three components. First -
a trading strategy that the trader uses, second depends on how he
manages his capital and the last part is trader's ability to follow the
rules, chosen by him, e.i. discipline.
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If you have the strategy, which you have already tested properly, you can be sure that your income will be stable.
Each trader should use the money management. The trader must be clear
about the rules of opening and closing positions for a successful
application of the money management methods and accurate mathematical
understanding of trading itself. Also he has to have an idea about
strategies testing results on historical statistics.
If you have the strategy, which you have already tested properly, you
can be sure that your income will be stable. When a trader has a trading
strategy, in order to improve trading results, he can confidently apply
money management methods.
There are several methods of the money management:
No money management. This technique involves the usual method,
which is used by many traders. It means the entering the market by one
unit every time the system beeps on the input. This method has both
advantages and disadvantages.
Multiple contracts. Some features of this method are the same
with the previous one, but the difference is that in this case the
trader opens several positions. Despite the similarity, this type of
money management has its own distinctive features, which you have to
consider while trading on Forex.
A fixed amount, exposed to the risk. When trader decides, what
amount of cash he can put at risk once receiving the signal to open the
position, he can use this type of money management. For example, trader
can put 1000 USD under risk, for each signal to enter the market, but
not more than that.
When the trader determines, what percentage of the total bill he can put
at risk on any given signal to the deal, he use the fixed percentage of
capital. For example, a trader can set the risk of 5% of the total
account on each trading signal to the transaction, but not more than
that.
The trade deals with profit and loss agreement. This method is
often called the construction of the pyramid (up or down) or the forward
and backward approach. According to this method, a trader determines
trading volume after a successful return. For example, after
unprofitable transaction to compensate the losses, he can manage to
double the volume of trading after following further trade signal. Also
this strategy in the Forex market is called "Martingale".
Intersection of the price curves. Following this method, trader
determines short or long moving average losses and profits of the
transaction. If the short average exceeds the long one, it indicates
that the system works more perfectly than in the past. Based on this
information, trader can start opening a position. If the short average
is below the long, then it is not necessary to start the transaction.
Losses or profitability of all signals to execute order, undertaken or
not, is calculated by averaging.
Application of optimal f. This approach has some risks, so the using of it is not recommended for the beginners.
Moreover, another important factor of the money management is the method
of Forex trading. It can be aggressive or conservative. Conservative
always increases deposit slower, but this is much more stable than a
trader with aggressive method. Choosing the right trading method
directly affects the risks and gains from trade.