Money management is extremely important when it comes to forex trading. If you know how to effectively manage the capital of your account, you will never lose your deposit given you are applying a pre-planned strategy. Therefore, in this article we want to stress on:
- the importance of a successful management strategy
- explain what it should include
- give a few examples on successful money management
Since the market does not have any patterns in terms of the signals for the exact entry points it is safe to say that we all have a 50% probability of being profitable. And since the signals have no advantage over immediate entry into the market at the current price, we will not waste time looking for them and waiting.
It is important to have a guideline when it comes to money management, in which direction to trade and when to change the direction of a trade. You should also understand that when you enter the market, you have a 50% chance so do not think that once you have chosen a trend for opening trades the price will necessarily go by that trend, it will with the same probability go against it.
One of the most important advantages in choosing the direction of trade is the ability to focus on the trend without movements that may occur against the trend.
Do not forget that for the USD / CHF and EUR / CHF there was a countertrend movement, which was 1,200 points. Therefore, the higher the timeframes for trading you use, the safer your trading will be.Keep in mind that minus $ 100 floating loss on an open trade/s can have different danger for the account.
$1,000 deposit with the volume of the orders of 5 lots and minus 20 points, we have a minus $ 100 floating loss. You need 200 points to lose your whole account.
$1,000 deposit with a volume of 0.1 lot and minus 1000 points, we have a minus $100, after 9000 points the deposit will be lost. The maximum market movements in the history of the Forex market are no more than 7500 points.
Example 3 (You can manage volumes)
Deposit $ 1,000 and open an order of 5 lots and put a pending order of 3 lots. In the end, we get the same minus $100, but only the result volume of only 2 lots.
Using such simple actions, we changed the risks depending on the situation. You can also partially close the trades. While reducing the risks you can manage the volumes.
Set a goal to learn how to manage volumes so that you can get out of the drawdowns of 10% with an ease.
The next step is to find a tool that will help you find the starting point of a trend (even if this start will be delayed) and end points so that you understand when to manage your volumes. That is extremely important when it comes to money management. If you go with the trend you will not get in without a rollback.
But if the trend has changed and the orders have remained on the previous trend, then think about the fact that you already stand against the possible trend without a rollback. Therefore it is worth considering the reduction of orders against the trend.