Money management (money management) in the Forex market


Greetings !

My name is Bharat, I trade on Forex, and in my free time, I share my thoughts on the pages of the www.tradertrustedacademy.comwebsite.

It’s amazing to see a trading terminal for the first time and catch up on the idea of making a huge fortune in the Forex market, many traders immediately make a fatal mistake. Peering at the schedule, trying to find patterns, we lose sight of the most important thing, the management of our own capital.

We forget that our hard-earned money, without proper attention and proper management methods, is simply doomed to disappear.

Take any type of activity, starting from a large business and ending with a household.

Suppose the task is to develop a startup. Any business begins with a business plan, where everything is registered absolutely: definition of risks, items of expenses and income, force majeure circumstances and the like. When the plan is defined, it remains only to work, adhering to the stated recommendations.

Housekeepers distribute money in the same way to buy food, clothing, household goods and the like. Each penny has its own purpose and not one will be spent in vain. It is important: 1) to correctly invest the available savings, 2) in no case to waste it and 3) try to multiply what is left.

As soon as it comes to trading, we completely forget about everything and the first thing we do is peer at the chart, revealing patterns and dreaming of wealth. Meanwhile, professional trading begins not with technical or any other analysis, but with money management, with the rules of managing your own capital.

Open your eyes to trading!
Reliable partner. Trading in financial instruments carries high risks.

Trading begins with money management
At one time, I came across an article that described a certain experience. One brokerage company, hired 2 novice traders to trade on the exchange. These traders were provided with a strategy with very specific criteria for entry, with the exception of one, the first should only sell, the second should only buy.

The experiment ended predictably, both traders merged their deposits.

After that, the same company invites 2 traders, but this time real professionals. The task is the same. Take the same strategy and only sell to one, just buy to the other.

Bottom line: both traders have earned. Why did this happen? It’s all about money management.

Money management (money manager, or MM) is a strict set of rules that allows you to apply methods of effective money management.

before we start trading, before we start studying the charts, let’s try to deal with the risks and probabilities of a positive or negative outcome of events.

It is believed that if a trader earns in 25% of cases, this is a successful trader who is able to earn Forex in the long run. Where did this figure come from?

In the video below, ForexClub conducted an interesting experiment. The author counted all the candles since 2000 on the 15-minute, hourly and 4-hour charts. Further, with the help of the program, I calculated the outcome, a random transaction. It turned out that if you randomly sell and buy, then at 48%, the trader will earn.

But there is another factor, money. Is there enough money to survive the drawdown or not. There are two options, either enough or not. It turns out that the gain remains at 24%.

The theory is not entirely scientific, probability theory could be used here, but the percentage of gain, which is 24% (very close to 25%), is found everywhere. Which book do not open, many authors mention the ratio of positive transactions to negative, as 1 to 3, and this is 25% of positive transactions.

It turns out, in one positive transaction, we must beat back the 3 losing ones, this is only to be at zero, but we also need to earn money. It turns out that the ratio of stop to profit should be at least 1 to 4, otherwise we should not see money. It remains unclear how much money can be risked in one transaction in order to ultimately remain in the black?

At first glance, it turns out that since every fourth transaction, according to statistics, should be closed in plus, then 25% of the deposit should be risked. But this is not true arithmetic, because a series of losing trades is not predictable. We can lose 6 times in a row, and then earn 2 times in a row. According to statistics, our ratio remains 1 to 3, but for now we will lose money 6 times in a row, nothing will remain of our deposit.

Therefore, adequate risk management at Forex is:

aggressive trading – 10% of the deposit;
moderate trade – ~ 5% of the deposit;
conservative trade – 1% of the deposit.
Now we understand how much money we are ready to spend in one transaction, but there is an equally important issue that is included in the Forex risk management subsection: “How to calculate the volume for one transaction”.

We use the formula:

Lot = Risk / (StopLoss * Step), where
Lot – the volume that will be included in the transaction;
Risk – the amount of money that you are willing to lose;
StopLoss – level of loss limitation (in points);
Step – price step (in money).
I will give an example. Let’s take everyone’s favorite EURUSD, with the following values:

Deposit amount = $ 1000;
Risk per trade = 5%;
StopLoss = 20 pp;
Step = when using a standard lot, 1 pp = $ 10.
Let’s make a calculation.

$ 1000 * 0.05 = $ 50
In one transaction, you can spend only $ 50, this is our risk. We use the formula:

Forex Money Management Methods
We dealt with risk management above, but this knowledge will help to save the deposit, but not to increase it. For capital to grow, it will require knowledge of proper capital management methods.

Today, several interesting methods of money management (money management) on Forex are actively used.

Fixed Volume Trading
In the classical interpretation, trading in a fixed volume implies its literal use. For example, we have a deposit of $ 1000. We take a fixed volume of 0.1 lots and trade.

But this approach is not logical. After all, if you earn money and the deposit starts to grow, trading in a volume of 0.1 lot does not contribute to profit in full. Two big differences trade 0.1 lot with $ 1,000 or $ 10,000. In the first case, the risks are justified; in the second, they are too low and do not inhibit the growth of the deposit.

Incremental volume increase
Step-by-step increase in volume, a certain continuation of the first paragraph. In this case, the volume of the transaction increases along with the growth of the deposit and decreases with its drawdown. When trading using the method of incremental increase in volume, I suggest working according to the following scheme, for every + $ 100, add 0.01 lot.

Trade interest on deposit
Trading with the calculation of the percentage of the deposit was analyzed above. In this case, it is easiest to use Excel.

Create a table in which indicate the percentage of risk that you are interested in, the available deposit, which stop is planned to be set in points, and write a formula for calculating a possible lot for a deal. It will turn out a certain calculator for money management. It will save a lot of time.

Martingale method
The martingale method is not the best. There are several variations, but the idea is the same, with a losing transaction or a drawdown in a deposit, a transaction with an increased volume is opened and this happens until the position becomes a plus.

It is not difficult to guess that the negative feature of this method is the lack of money management. Indeed, as soon as the position begins to sag, the trader is forced to open a deal with an increased volume, which means a violation of the rules of money management, which offers to lay no more than 1 – 10% risk per transaction.

In the best case, the transaction will go into a plus and the position will be closed, in the worst, if the price still goes down, you will have to open an order with an even larger volume and so on until we get a plus, or the money on the deposit does not run out and a margin call arrives.

Do not trade for the last
As professional traders say, in the ideal case, the money that is deposited on your deposit is best considered already merged. If you can take this without hysteria, then you can start trading, if this is your last money, then it is better to invest it in another business.

Profit / loss ratio
There must be potential in the deal. When opening a deal, it is clearly necessary to realize how much I can lose and what I will have from this. He who does not take risks does not drink champagne, but the risk must be justified. It’s stupid to risk $ 1000, in order to get $ 100. In addition, based on the statistics laid out above, the best ratio is 1 to 4, that is, if the stop is 20 pp, then the profit should be at least 80 pp.

How much to trade
Depending on the aggressiveness, use 1% – 10% of the risk deposit.

Big profit, takes time
Profit growth is achieved by earning a large number of points from the market. If you see that you have entered a good, trending market, do not rush to jump out of it, be patient.

Withdraw profit
The ultimate goal of any work done is to receive a reward. Make it a rule to withdraw earned money, otherwise trading can turn into an ordinary game, without fear of losing capital.

Forex Money Management Methods
We dealt with risk management above, but this knowledge will help to save the deposit, but not to increase it. For capital to grow, it will require knowledge of proper capital management methods.

Today, several interesting methods of money management (money management) on Forex are actively used.

Fixed Volume Trading
In the classical interpretation, trading in a fixed volume implies its literal use. For example, we have a deposit of $ 1000. We take a fixed volume of 0.1 lots and trade.

But this approach is not logical. After all, if you earn money and the deposit starts to grow, trading in a volume of 0.1 lot does not contribute to profit in full. Two big differences trade 0.1 lot with $ 1,000 or $ 10,000. In the first case, the risks are justified; in the second, they are too low and do not inhibit the growth of the deposit.

Incremental volume increase
Step-by-step increase in volume, a certain continuation of the first paragraph. In this case, the volume of the transaction increases along with the growth of the deposit and decreases with its drawdown. When trading using the method of incremental increase in volume, I suggest working according to the following scheme, for every + $ 100, add 0.01 lot.

Trade interest on deposit
Trading with the calculation of the percentage of the deposit was analyzed above. In this case, it is easiest to use Excel.

Create a table in which indicate the percentage of risk that you are interested in, the available deposit, which stop is planned to be set in points, and write a formula for calculating a possible lot for a deal. It will turn out a certain calculator for money management. It will save a lot of time.

Martingale method
The martingale method is not the best. There are several variations, but the idea is the same, with a losing transaction or a drawdown in a deposit, a transaction with an increased volume is opened and this happens until the position becomes a plus.

It is not difficult to guess that the negative feature of this method is the lack of money management. Indeed, as soon as the position begins to sag, the trader is forced to open a deal with an increased volume, which means a violation of the rules of money management, which offers to lay no more than 1 – 10% risk per transaction.

In the best case, the transaction will go into a plus and the position will be closed, in the worst, if the price still goes down, you will have to open an order with an even larger volume and so on until we get a plus, or the money on the deposit does not run out and a margin call arrives.

Do not trade for the last
As professional traders say, in the ideal case, the money that is deposited on your deposit is best considered already merged. If you can take this without hysteria, then you can start trading, if this is your last money, then it is better to invest it in another business.

Profit / loss ratio
There must be potential in the deal. When opening a deal, it is clearly necessary to realize how much I can lose and what I will have from this. He who does not take risks does not drink champagne, but the risk must be justified. It’s stupid to risk $ 1000, in order to get $ 100. In addition, based on the statistics laid out above, the best ratio is 1 to 4, that is, if the stop is 20 pp, then the profit should be at least 80 pp.

How much to trade
Depending on the aggressiveness, use 1% – 10% of the risk deposit.

Big profit, takes time
Profit growth is achieved by earning a large number of points from the market. If you see that you have entered a good, trending market, do not rush to jump out of it, be patient.

Withdraw profit
The ultimate goal of any work done is to receive a reward. Make it a rule to withdraw earned money, otherwise trading can turn into an ordinary game, without fear of losing capital.

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