Money Management In Forex Trading: Legal Considerations In Mississippi – Trade is the exchange of goods or services between two or more parties. So if your car needs gasoline, you trade your dollars for gasoline. In the old days, and still, in some societies, trade was done through barter, where one commodity was exchanged for another.

A trade might go like this: Person fixes B’s broken window in exchange for a basket of apples from B’s tree. It is a practical, easy to manage, day to day example of trading, easy management of risk. To reduce the risk, before fixing the window, person A can ask person B to show his apples to person B to make sure they are safe to eat. Business has been like this for millennia: a practical, thoughtful human process.

Money Management In Forex Trading: Legal Considerations In Mississippi

Money Management In Forex Trading: Legal Considerations In Mississippi

Now enter the World Wide Web and sudden risk can spiral completely out of control, in part because of the speed at which transactions take place. In fact, the speed of trading, instant gratification, and the adrenaline rush of making a profit in less than 60 seconds can often trigger a gambling habit that many traders fall prey to. Therefore, they may turn to online trading as a form of gambling rather than approaching trading as a professional business that requires proper speculative practices.

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Speculating as a trader is not gambling. The difference between gambling and speculation is risk management. In other words, with speculation, you have some form of control over your risk, whereas with gambling you don’t. A card game like poker can be played with a gambler’s mindset or a speculator’s mindset, often with completely different results.

There are three basic ways to bet: martingale, anti-martingale or speculative. “Speculation” comes from the Latin word

In the martingale strategy, you double your bet every time you lose and eventually the losing streak ends and you make a favorable bet, hoping to recover all your losses and make a small profit.

Using the anti-martingale strategy, you halve your bets every time you lose, but double your bets every time you win. This theory assumes that you can capitalize on a winning streak and profit accordingly. Clearly, for online merchants, this is the better of the two strategies to adopt. It is always less risky to take your losses quickly and add or increase your trade size when you win.

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However, no trade should be taken without first stacking the odds in your favor and no trade should be taken unless this is clearly not possible.

Therefore, the first rule in risk management is to calculate the chances that your business will succeed. To do this, you must understand fundamental and technical analysis. You need to understand the dynamics of the market you are trading and know where the psychological price trigger points are, a price chart can help you decide.

The next important factor is how you control or manage the risk once the decision to take the trade is made. Remember, if you can measure risk, you can mostly manage it.

Money Management In Forex Trading: Legal Considerations In Mississippi

In stacking the odds in your favor, it’s important to draw a line in the sand that will be your cut-out point if the market trades to that level. The difference between this cut-out point and your entry into the market is your risk. Psychologically, you must accept this risk upfront before you take a trade. If you can accept the potential loss and you are okay with it, then you can consider trading further. If the loss is too much for you to bear, you should not take the trade, otherwise you will be severely stressed and unable to be objective as your trade continues.

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Since risk is the opposite side of the coin to reward, you must draw a second line in the sand where, if the market trades to that point, you move your original cut-out line to secure your position. This is called sliding your stop. This second line is the price at which you break even if the market undercuts you at that time. Once you are protected by a break-even stop, your risk is reduced to virtually zero as long as the market is very liquid and you know your trade will be executed at that price. Make sure you understand the difference between stop orders, limit orders and market orders.

The next risk factor to study is liquidity. Liquidity means that there are enough buyers and sellers at current prices to take your trade easily and efficiently. In the context of Forex markets, liquidity, at least in major currencies, is never an issue. This is called market liquidity, and in the forex market, it accounts for about $6.6 trillion in trading volume per day.

However, this liquidity is not necessarily available to all brokers and is not the same across all currency pairs. It is really broker liquidity that affects you as a trader. Unless you are trading directly with a large forex dealing bank, you will need to rely on an online broker to hold your account and manage your trades accordingly. Questions related to broker risk are beyond the scope of this article, but large, well-known and capitalized brokers should be fine for most retail online traders who have enough liquidity to execute your trade effectively.

Another aspect of risk is determined by how much trading capital you have. Risk per trade should always be a small percentage of your total capital. A good starting percentage might be 2% of your available trading capital. So, for example, if you have $5000 in your account, the maximum allowable loss should not be more than 2%. With these parameters, your maximum loss will be $100 per trade. A 2% loss per trade means you can be wrong 50 times in a row before your account is deleted. This is an unlikely scenario if you have the right system in place to stack the odds in your favor.

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One way to measure the risk of each trade is to use your price chart. This is best demonstrated by looking at the chart below:

We have already decided that we should draw our first line in the sand (stop loss) that we can deduct from the position if the market trades to this level. The line is set at 1.3534. To give the market some room, I set the stop loss at 1.3530.

A good place to enter a position would be 1.3580, in this example, just above the hourly closing high after a failed attempt to form a triple bottom. So the difference between this entry point and exit point is 50 pips. If you are trading with $5,000 in your account, you can limit your losses to 2% of your trading capital, which is $100.

Money Management In Forex Trading: Legal Considerations In Mississippi

Suppose you are trading mini lots. If one pip in a mini lot equals approximately $1 and your risk is 50 pips, you are risking $50 for each lot you trade. You can trade one or two mini lots and keep your risk between $50-100. You shouldn’t trade more than three mini lots in this example if you don’t want to violate your 2% rule.

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The next biggest risk enhancer is leverage. Leverage is the use of the bank’s or broker’s money rather than your own strict use. The spot forex market is a highly leveraged market in which you can deposit just $1,000 to trade $100,000. This is a 100:1 leverage factor. A pip loss equals $10 in a 100:1 leverage situation. So if you have 10 mini lots in a trade and you lose 50 pips, your loss will be $500, not $50.

However, one of the biggest advantages of trading the spot forex markets is the availability of high leverage. This high leverage is available because the market is so liquid that it is easy to cut out of a position quickly and, therefore, it is easy compared to other markets to maintain leveraged positions. Of course leverage cuts two ways. If you are leveraged and you make a profit, your income will increase very quickly but on the contrary, losses will quickly destroy your account.

But of all the risks inherent in trading, the most difficult risk to manage, and the most common risk that causes a trader to lose, is the trader’s bad habit patterns.

All traders are responsible for their own decisions. In trading, losses are part of the norm, so a trader must learn to accept them

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