In Forex it is difficult to earn money and even more difficult to manage the invested money. Once traders learn to manage and control their losses, the probability to earn profits increases. Money management is all about the amount of money you are putting in a trade and the degree of risk you are taking.
Risking a small percentage of your account
Experts of the Forex trade advise to invest a mere 1% to 2% of the total account so as to be able to accept loss of the trade if at all it occurs. The purpose is to be able to survive a loss and learn from your mistake. You must remember that with each loss, your core equity gets depleted and thus your chances to remain in the business for long reduce.
Regaining the lost money to break even your account
It is essential to keep a track of the amount of money lying in your core equity after each lost trade. In addition to this, it is vital to calculate the amount of money you need to earn in order to bring your account back to the break even point. This has to be kept in mind while trading further because if you keep losing, the percentage of return money keeps expanding making it even more difficult to bring your account back to the original size.
Hedging
When the currency exchange rates move unfavorably, you need to adopt the policy of hedging in order to protect your stock position. You declare to future sell your holdings at a set price so as to free yourself from market fluctuations. This is helpful to survive unpredictable price changes.
Diversify your trade
Trading in only one currency pair provides few trading opportunities. Thus it is advised to diversify and trade in different currency pairs. Each time you pick up a new trade, the base of your calculations is your core equity and not the starting balance, which means that you have lesser money to stake. The trick here is to switch to a currency pair with a lower correlation coefficient so that your risk percentage is reduced. For example, if you were trading in EUR/USD, your next currency pair should be USD/CHF because these two pairs have a high negative correlation such that when one pair goes up, the other falls down.
Martingale/Anti Martingale strategy
According to the Martingale strategy, traders increase the stake when they are losing with the intention to be able to cover-up for the losses with one big win. On the other hand, according to Anti Martingale strategy, traders reduce the stake when they are losing and increase it when they are winning.
Risk/Reward ratio
A good trader will enter a trade if he can foresee a reward that is 3 times the risk involved. This 3:1 reward/risk ration ensures profits in the long run.
In order to stay in the forex business for long it is vital to protect your account. Once you ensure your stay, you can then focus on growth prospects. Therefore, before you aim for profits, learn how to cope with losses. Money management teaches you all of this.
No comments:
Post a Comment