Trading strategies and money management
Money management and trading strategies are intertwined concepts. The foundation of your trading strategy is to manage your financial assets correctly. A correct trading strategy requires you to practice money management aimed at both making profits in the forex markets as well as protecting your existing investments. This is an integral part of not only Forex but other financial markets, the trading system.
Trading in the financial markets can result in high returns or money losses. You are entering the trade, and the market has a 50% chance of rising, which means there is also a 50% chance of falling.
The most important rule of thumb is to only risk a small portion of your account at a time. That way, you won't have an inevitable streak of losses.
What is money management?
Money management is a set of rules that contain methods and strategies to help you conserve and increase your capital. Money management is the process of analyzing possible risk and profit factors while making transactions. During this process, it is determined how much risk can be taken and how profitability can be maximized while managing the transactions to be opened.
Why should you have a money management strategy?
A trader must protect his money at all times. The goal is to keep the amount of money growing. Of course, you should also anticipate your loss probability. If you set out to win in the Forex markets, if you are taking risks, otherwise, it will happen. The basic strategy in money management is to constantly evaluate the risk dimensions and create your money strategy that does not risk a large part of the capital.
You should plan when you will buy and sell and at which point you should stop. There are a lot of situations where merchants who start losing undertake more risky transactions to compensate their losses, and the risks taken with instant decisions lead to a series of large losses. At this point, sticking to a strategy prevents you from doing uncontrolled trading.
There is no guaranteed profit, probabilities play a big role in outcomes due to the nature of the trade, and it is not always possible to predict or predict probabilities. However, with a good money management strategy, you can prepare adverse event scenarios and manage when and how you should behave with a set of rules.
The Basic Rules Of Money Management Are As Follows
- Mistakes and losses are likely to occur in the Forex markets. Making unplanned moves to compensate for lost transactions or taking greater risks after a few successful transactions are moves that should be avoided.
- The rule of limiting successive losses should be followed. If unsuccessful transactions have occurred consecutively, you should temporarily stop the process.
- Use stop loss. In this way, you limit the risks and determine how much you can lose.
- Forex markets are variable, work in different ways at the same time. It would be best if you did not work with the single money management option.
- Use different strategies. In the face of changes in the market, you need to develop other moves and strategies. Do not insist on your pre-determined strategies; update your actions.
What is Percent Lost?
Percent Loss is defined as the decline of capital from high equity to a lower level, usually expressed as a percentage. The percentage of maximal loss means the greatest rate of historical loss an account suffered.
What is a Drawdown?
Drawdown refers to the amount of money you lose while trading. It is expressed as the percentage ratio of the lost amount to your core capital. A drawdown doesn't reflect the measure of your overall performance, and it just measures the amount of money you lose while performing that performance. So if all transactions are closed with profit, a drawdown situation will not occur. Drawdown calculation begins with a transaction that closes with loss and continues until the account reaches a lower equity value.
What is the Martingale System?
Traders, who increase their experience in Forex, turn to more stable and risk-free systems. As a result of these demands, systems such as EA (Exper Advisor), MAM and PAMM have been developed. Some users use the software-assisted Martingale system, which is a multiplier-doubling method.
The Martingale system is a system that can reset the entire investment budget when used unconsciously. Therefore, it is recommended for users who are experienced as traders and have sufficient knowledge of the system.
When the profit and gain coefficient are equalized according to the leverage ratio used in the target system, if the loss is lost due to the transaction, the next transaction is re-entered by adding the collateral at the rate of loss coefficient. This cycle is repeated in every malicious transaction and continues until a profitable transaction is caught.
Anti-Martingale methods increase position size in profitable trades. It is based on the idea of increasing the Anti-Martingale system. The primary purpose of the Anti Martingale System is a system that aims to double the amount when we experience a loss and pass both loss and profit.
Trading strategies & Money Management
Money management is essential for all investment vehicles. However, in Forex markets, money management is much more critical due to its high leverage effect. Successful money management allows you to own your capital, stay in the market, and survive as a trader, especially in times of crisis when there are sudden and big drops in the market. We can say that the critical point in money management is the ratio of open positions to total capital.
As the ratio of the position, you create with the transactions you make to the capital increases, the pressure on the investor increases. Suppose a significant portion of the investor's principal is to be lost when the position is closed with a severe loss. In that case, every move on the chart turns into a cycle that prevents the person from making healthy decisions. The pressure the investor is subjected to sometimes causes the position to be closed in an unprecedented place. Sometimes this situation causes constant intervention to stop loss and take profit levels linked to the position. As a result, the risk of loss incurred in the beginning grows exponentially, and the position can reach levels that can affect the total capital.
The trading strategies are the way of how you will be placing your trades. Trading strategies are classified into three categories according to the trade duration is concerned as follows:
Conservative Strategy: Its an investing strategy that prioritizes the preservation of capital over market returns. Briefly its lower-risk trades. This strategy will allow you to avoid losing your capital as you experiment and learn.
Semi-Conservative Strategy: Its same as conservative but the durations are shorter and make more trades per day.
Aggressive Strategy: Its a trade tactics with high risk. Its defines as high returns strategy.
Trading strategies & Money Management Sample Case
- If we examine the ratio of the position opened to the capital with an example: Suppose you have opened positions with 50% of your capital, your stop loss, and take profit points are the same as your position collateral.
- You have chosen the goal of increasing the balance by 50% by risking 50% of your capital.
- When you lose your position, you will lose 50% of your capital.
- In the next stage, you will need to risk 100% of your capital to reach your starting capital.
- However, if you had opened a position using 10% of your capital at the beginning, even if you lost, 90% of your money would be standing still. It would be enough to risk 11% of your remaining capital to compensate for such a loss.
- Investors can sometimes make consecutive losses. Not only because of your investment preferences and individual decisions but also due to the whole forex market stumbling, and huge losses can be experienced.
- At this point, minimizing the risk will allow you to earn in the long run.
- When things go well, you need to protect your capital to make a profit and still maintain your investments. Experts recommend that the number of open positions for the forex markets should not exceed 10% of the total capital ratio.
Money and Risk Management
Long-term existence in Forex markets is the basic condition of winning. You should be aware of transaction costs, the element of variability and randomness, and the possibility of mismatching expectations and experiences. You should have a good trading plan, your brokerage organization should be reliable, and you should use MetaTrader or a similar, professional platform.
To protect your capital, note the following three basic rules:
- Don't invest more than 2% of your capital in high-risk transactions
- Do not take open positions with more than 10% of your trading account.
- Try not to lose more than 25% of your trading account.