How To Invest Money In Forex Trading – Place two new traders on the screen. Provide them with the best high probability settings. and so that each person chooses the opposite side of the trade. for good measurement It is very likely that both will end up losing money, however, if you choose two advantages and have them trade in opposite directions. Often both traders make money. Even though the assumptions seem contradictory, What is the difference? What is the most important factor that separates experienced traders from amateurs? The answer is money management.
The same goes for dieting and exercise. Money management is something that most traders take for granted. But in real life, it is rarely practiced. The reason is simple: just like eating healthy food and keeping fit. Managing money can seem like a difficult and unpleasant activity. It forces traders to constantly monitor their positions and take the necessary losses. And few people like to do that. However, as Figure 1 proves, losing money is essential to long-term trading success.
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Please note that the trader must earn 100% of his or her capital. This is a feat achieved by less than 1% of traders worldwide, just to break even on an account with a 50% loss. Once the loss reaches 75%, the trader must quadruple his or her account to bring it back. Original Equity – Really Hard Work!
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Although most traders are familiar with the above numbers, But it was inevitably neglected. Trading books are full of stories of traders losing one, two, or more pairs.
Years’ worth of profits on a single trade went horribly wrong. In general, Inevitable losses are the result of sloppy money management. without hard stopping And it averages down in longs and on average goes up in shorts. above all else The inevitable loss comes only from the loss of discipline.
Most traders start their trading careers. Whether consciously or subconsciously by imagining “The Big One”, a trade that would make millions and enable them to retire young and live carefree for the rest of their lives. In Forex, this fantasy is reinforced by market folklore. Who can forget the time when George Soros “destroyed the Bank of England” by selling the pound and walking away with a stunning profit of $1 billion in a single day? But the hard truth for most retail traders is that Instead of experiencing Despite the “big win”, most traders fall prey to “big wins”. Just one “big loss” can knock them out of the game forever.
Traders can avoid this fate by controlling their risk through stop losses. In Jack Schwager’s famous book “Market Wizards” (1989), day trader and trend follower Larry Hite offers this helpful advice: “Never risk more than 1% of your total net worth on any trade. Risking only 1%, I am indifferent to anything. Personal Trading” This is a very good guideline. A trader can make 20 mistakes in a row and still have 80% of their equity remaining.
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The truth is that few traders have the discipline to practice this method consistently. It’s not unlike a child who learns not to touch a hot stove after being burned once or twice. Most traders can absorb the lesson of risk discipline only through the terrible experience of financial loss. This is the most important reason why traders should use only speculative funds when first entering the Forex market. When beginners ask how much money they should start trading with One seasoned trader says: “Choose a number that will not have a significant impact on your life if you lose it completely. Now subdivide that number by five because your first few trading attempts will It is likely to end in an explosion.” This is also sage advice. And it is worth following for anyone thinking of trading Forex.
In general, There are two ways to practice successful money management. Traders can take small breaks often and try to reap profits from big winning trades. just a few times Or traders can choose to make a small profit. Many and infrequent but large stops in the hope that many small profits will be more valuable. Just a few big losses. The first strategy produces many cases of minor mental pain but produces significant moments of ecstasy. The second strategy, on the other hand, provides many minor pleasures but at the cost of experiencing less mental distress. Disgusting in some respects With this broad stopping approach It is not uncommon to lose a month or two of profits in one or two sessions.
In most cases The method you choose depends on your personality. It is part of the discovery process for each trader. One advantage of the Forex market is that it supports both formats equally. at no additional cost to retailers. Because Forex is a spread-based market. The cost of each transaction is therefore the same. Regardless of the size of the trader’s position.
For example, on EUR/USD, most traders will find a spread of 3 pips equates to a price of 3/100.
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1% of reference position This cost is the same in percentage terms. It doesn’t matter if a trader wants to trade 100 units of a lot or one million units of a currency. For example, if a trader wants to use a lot of 10,000 units, the spread will be $3. For just 100 units, the spread will be just $0.03. Contrary to the stock market, for example, the commission for 100 shares or 1,000 shares of a $20 stock may be set at $40, making the actual cost of the transaction 2% in in the case of 100 shares, but only 0.2% in the case of 1000 shares. This kind of variance makes it difficult for retail traders in the equity market to expand their positions. This is because commissions significantly distort costs. However, Forex traders have the advantage of consistent pricing and can practice any form of money management of their choice without worrying about variable transaction costs.
When you are ready to trade with a serious money management approach and properly allocated funds to your account. You might consider four types of holidays.
1. Equity Stop – This is the simplest of all stops. Traders risk only a predetermined amount of their account on a single trade. A common indicator is to risk 2% of the account on any given trade. On a hypothetical $10,000 trading account, a trader might risk $200, or approximately 200 pips, on one mini lot (10,000 units) of EUR/USD, or just 20. Points in a standard lot of 100,000 units. Aggressive traders may consider using a 5% stop equity, but keep in mind that this amount is generally considered the upper limit for prudent money management. This is because 10 consecutive wrong trades will cause the account to be drawn down by 50%.
One serious criticism of equity stops is that they place arbitrary exit points on traders’ positions. Trading is not the result of a logical response to market price movements. But to satisfy the trader’s internal risk control.
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2. Chart Stops – Technical analysis can create thousands of possible stops. It is driven by the price movement of the chart or by the signals of various technical indicators. Technically oriented traders want to combine these exit points with standard equity stop rules to chart their stops. A classic example of a chart stop is the swing high/low point in Figure 2. A trader with our hypothetical account of $10,000 using a chart stop could sell one mini lot risking 150 points, or approximately 1.5% of the account.
3. Volatility Stops – More complex versions of chart stops use volatility instead of price action to determine risk parameters. The idea is that in a highly volatile environment When the price moves widely Traders need to adapt to the current conditions. and leave the position open to more risk. To avoid being stopped by market noise. The opposite holds true for low volatility environments. This requires compressing risk parameters.
One simple way to measure volatility is with Bollinger Bands®, which uses standard deviation to measure price variation. Figures 3 and 4 show high volatility and low volatility stops with Bollinger Bands® in Figure. 3 Stopping volatility also allows traders to use scaling methods to achieve better “mixed” prices and faster breakeven points. Note that the total risk of a position should not exceed 2% of the account, so it is essential that traders use smaller lots to optimize the size.
4. Margin Stop – This is perhaps the most unconventional money management strategy. But it can be an effective method in Forex. If used carefully Different from the exchange market The Forex market operates 24 hours a day, so Forex dealers can liquidate their clients’ positions.