Successful trading on the Forex market includes three components. First – a trading strategy that the trader uses, second depends on how he manages his capital and the last part is trader's ability to follow the rules, chosen by him, i.e. discipline.
Each trader should use the money management. The trader must be clear about the rules of opening and closing positions for a successful application of the money management methods and accurate mathematical understanding of trading itself. Also he has to have an idea about strategies testing results on historical statistics.
If you have the strategy, which you have already tested properly, you can be sure that your income will be stable. When a trader has a trading strategy, in order to improve trading results, he can confidently apply money management methods.
Money Management Methods
No money management.
This technique involves the usual method, which is used by many traders. It means the entering the market by one unit every time the system beeps on the input. This method has both advantages and disadvantages.
Some features of this method are the same with the previous one, but the difference is that in this case the trader opens several positions. Despite the similarity, this type of money management has its own distinctive features, which you have to consider while trading on Forex.
A fixed amount, exposed to the risk.
When trader decides, what amount of cash he can put at risk once receiving the signal to open the position, he can use this type of money management. For example, trader can put 1000 USD under risk, for each signal to enter the market, but not more than that.
When the trader determines, what percentage of the total bill he can put at risk on any given signal to the deal, he use the fixed percentage of capital. For example, a trader can set the risk of 5% of the total account on each trading signal to the transaction, but not more than that.
The trade deals with profit and loss agreement.
This method is often called the construction of the pyramid (up or down) or the forward and backward approach. According to this method, a trader determines trading volume after a successful return. For example, after unprofitable transaction to compensate the losses, he can manage to double the volume of trading after following further trade signal. Also this strategy in the Forex market is called "Martingale".
Intersection of the price curves.
Following this method, trader determines short or long moving average losses and profits of the transaction. If the short average exceeds the long one, it indicates that the system works more perfectly than in the past. Based on this information, trader can start opening a position. If the short average is below the long, then it is not necessary to start the transaction. Losses or profitability of all signals to execute order, undertaken or not, is calculated by averaging.
Application of optimal f.
This approach has some risks, so the using of it is not recommended for the beginners.
Moreover, another important factor of the money management is the method of Forex trading. It can be aggressive or conservative. Conservative always increases deposit slower, but this is much more stable than a trader with aggressive method. Choosing the right trading method directly affects the risks and gains from trade.