Successful trading in the foreign exchange market includes three components. The first is the trading strategy that the trader uses. The second depends on how he manages his capital. The last part is the trader's ability to follow the established rules exactly, that is, to maintain discipline.
Every trader should use money management. For the successful application of money management methods and an accurate mathematical understanding of the trade itself, a trader must clearly understand the rules for closing and opening positions and have an idea of testing the strategy on historical statistics.
If you have a properly tested strategy, you can be sure that your income will be stable. When a trader has a trading strategy, he can confidently apply money management techniques to improve trading results.
Money management methods
- Lack of money management.
- This technique is the usual method used by many traders. It consists in entering the market with one unit each time the system signals to enter. This method has both advantages and disadvantages.
- Multiple contracts.
- This method has similarities to the previous one, but the difference is that the trader opens several positions. Despite the similarities, this type of money management has its own distinctive features that should be considered when trading on Forex.
- A fixed amount at risk.
- When traders decide how much money they can risk after all the signals to open a position, this type is used. For example, a trader can risk up to 1000 USD, but no more than that for each signal to enter the market.
- A fixed percentage of capital is applied if the trader determines how much of the total amount of the account he can put at risk for any given signal to the deal. For example, a trader can set the risk at 5%, but not more than this, of each trading signal's total account to make a deal.
- Reconciliation of trade deals with profit and loss.
- This method is often referred to as pyramid building (up or down) or the direct and reverse approach. According to this method, the trader determines the trading volume after a successful profit. For example, after a losing trade, he may conclude doubling the trading volume after a further trading signal to compensate for the loss. This strategy is also called "Martingale" in the Forex market.
- The intersection of price curves.
- According to this technique, the trader determines the short or long moving average of the transaction's losses and profits. If the short average is superior to the long one, then this indicates that the system works more perfectly than in the past. Based on this information, the trader can proceed to open a position. If the short average is below the long one, then you should not start a trade. The unprofitability or profitability of all signals to make deals, accepted or not, is calculated by averaging.
- Applying optimal f.
- This approach has some dangers, so it is not recommended to use it for novice traders.
Also, the trading method is considered another important point in Forex money management. He can be aggressive or conservative. The conservative always builds up the deposit more slowly, but this is much more stable than a trader with an aggressive method. Choosing the right trading method directly affects the risks and rewards of trading.