When trading on Forex, it is necessary to know how to correctly trade your capital; how to calculate the amount of funds needed to make a deal in order to obtain sufficient earnings and if it comes to loss, how to not to loose your entire deposit. It is recommended that a client trade or risk no more then 5% of account equity per trade, and as your account grows, to lower the amount of risk accordinly.
Example: I have $500 in my account to trade with, a 5% risk per trade means that I'm willing to lose $25 if the trade goes bad.
$500*.05%=$25
$25 to risk, so I should probably trade with .1 lots or .01 lots with a S/L set accordingly.
Capital Management
- Capital management deficiency. Most traders, when opening a position, don’t calculate the amount of funds that are being used, nor estimate potential earnings, or calculate potential loss. If the capital is not very big to begin with, after several unlucky deals, it will completely disappear. We recommened a $500 deposit as a minimum.
- Multiple contracts. When opening several positions on the Forex market with different tools, a trader can make great earnings, especially if the price goes in the right direction. But the earnings, as well as the losses, can be considerable.
- Fixed amount. Depending on the amount of funds available, a trader decides how much can be put to risk when opening one or another position. The trader then does not exceed this self-set amount when making deals.
- The correspondence between profits and losses. It is necessary to track statistics yourself for all operations (the amount of losses, profits and the relation between them). When you can see the correspondence/correlation between them, you can then apply what you have learned to your trading.
- Intersection of the capital curve moving average. Most people are acquainted with moving averages, which can act like signals for going into the market or leaving it. According to this method, moving averages (long and short) are used to forecast deal results. If a short curve is above the long one, a position can be opened and will be profitable. If however it is under the long one, it is better to wait a bit.
Choosing one or another capital management method for trading on
Forex can help you correctly use your money on the market and help you earn profit. Capital management methods are used for opening positions.
Risk Management
Financial risk management doesn’t offer a successful trading guarantee, but assembles important parts of it. Each currency operation is a risk. That’s why using general management methods decreases potential loss.
Risk management methods are used after positions are opened. The main risk management method is an order submission that restrains losses.
Stop-loss (literally means to stop losses) – is a point where a trader goes off the market to avoid a disastrous situation. You have to set a stop-loss when opening positions.
There are several
types of stop-signals:
- An initial stop – determines the equity amount or pip amount that the trader is willing to lose. When the price moves toward this position and reaches it, the trader’s fixed level position closes, not exceeding the loss preset by the trader.
- A “trailing” stop signal – is when a price move towards a position, and a stop signal is set right after it, according to trader preferences. Should the direction change, if the price reaches that signal, the trader goes off the market, potentially earning profit (depending on when the price started moving).
- Stop signals at times – is when, in the course of time, the market is not able to earn the necessary profit, then the position closes
Ways to Reduce Risk and Loss of Equity- Trade with smaller lots
- Use smaller leverage