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Fundamentals of money management in Forex. To be a successful
trader, it is not enough to open an account and deposit some money into it. A
novice trader may not start making money right away. Before anyone starts
trading Forex, it would be wise to develop a smart
money management program. Forex trading, controlling
the cash flow in and out of the trader's pocket is what you need to know to
maintain your trading account and make a profit. A vital
skill is to maintain an equal ratio between the amount of profit and the
amount of loss on the average trade. Only in this case will trading be a
profitable business and not a game of luck and fortune. Let's look at the basic principles of money management. 1.
Every trader should have a reserve fund that can be spent in case of
emergency. The size of the reserve fund must be at least half the size of the
deposit. 2.
In order not to lose all your money, it is advisable to invest no more
than 10-15% of your entire deposit in one market. 3.
The transaction volume should not exceed 5% of the total account
capital. Otherwise, if a trader makes a losing trade, he may face runaway
losses. 4.
Every trader aims to make big money. However, everyone should be aware
of possible losses. If you invest your capital in a certain type of market,
the total margin should not exceed 20-25% of cash flow, since markets of the
same type move in a similar way. In this case, it makes sense to optimize
investments. More precisely, investments should be diversified. If one trade
fails, the profit on another trade can offset that losing trade. 5.
A trader must determine how diversified his portfolio is. Risk
diversification is one of the ways to hedge investments. A trader should
always maintain a balance between concentration and diversification. If a
trader opens several positions in parallel on at least 4-6 different types of
markets, this strategy ensures a fairly reliable placement of his portfolio. 6.
Stop Orders Make sure you set stop orders
when you leave your desk in front of the trading platform. This will allow
you to avoid losses. In addition, take profit orders are used to lock in
profits if a trading instrument moves in a favorable direction. 7.
Profit/loss ratio In the event of a trend reversal in the opposite
direction with an open position, the trader should maintain a balance between
possible losses and profits. Typically, the effective profit/loss ratio is
3:1. Otherwise, it would be wise not to open a trade. 8.
Trading multiple positions Let's assume a
trader enters the market by opening three positions. So it would be useful to
separate them into positional trading and trend trading. A position trader
holds a position for a long period of time, setting fairly flexible stop
orders that allow this trader to hold a position even during consolidation
and price correction. Position trading is the exact opposite of day trading,
where the position is limited by hard stop orders. This strategy is used for
speculation within one trading day. 9.
Rules for opening a position A position
should be opened only if the indicator gives at least one signal. Before
opening a position, it is important to determine the market entry price, the
closing price of a profitable position, the closing price of a losing
position, as well as the time for holding the position open. A position
against the trend should be opened with caution for a short period of time.
Similar things should be considered when trading a sideways market. 10.
Rules for holding a position and partially closing before the
expiration of the time frame A trader should hold a
position open only if the analysis confirms the decisions made before
entering the market. It would be advisable to partially close a position when
current losses have already exceeded expected losses or when the price has
reached a level at which a profit is expected. A trader should pause if the
total losses are still below the expected losses, the price is flat, or the
price has not yet approached the level calculated to make a profit. 11.
Rules for closing a position The deadline has
expired. Estimated profit received. The estimated loss has been reached. The
position brought maximum profit. Please always remember that a properly
designed risk diversification strategy is the stepping stone to profitable forex trading. Top-notch
forex tips to improve your forex
strategy. |
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