When working with the Forex market, a trader needs to follow the basic rules of deposit management. Ignoring the trading principles proven by many players, you can quickly or a little later drain all the capital.
How not to lose money
The first thing that you need for stable trading – is to protect the loss of all or most of the money. It is about money management, that is, the management of funds in the account. This is the basis without which it will not be possible to stay in trading for a long time.
Here are the key principles of deposit management that will help avoid capital drain:
- Don't use position averaging often. It is not uncommon for novice traders to try to compensate for losses after the transaction is closed in the minus. They believe in their analysis and open an order with most of the lot in the same direction. This method is also used to strengthen profitable positions. According to statistics, this format of working with the market does not always justify itself. Averaging – is a working tool, but you need to use it pointwise and carefully.
- Don't go against a strong trend. If the global movement has a significant growth potential, then it makes no sense to open transactions in the opposite direction. It is better to wait for corrections to enter the market according to the trend in small or strong drawdowns.
- Set stop loss. Trading without stops is a constant risk. Sometimes it allows you to avoid losses from market manipulations. In the absence of a stop loss, slippage will not lead to the closing of the transaction. But traders periodically make mistakes in their analysis, and then the currency pair goes in an unfavorable direction. In some cases, very far away. If leverage is used and several such transactions are opened, then you can lose all your money. Losses must always be limited – this is one of the mandatory conditions for stable earnings.
- Don't fully trust other analysts. The network has good forecasts, including paid signals. But they do not guarantee a hundred-percent result. A trader must have a trading system compiled and tested by him personally. Opinions of other analysts and signals of popular services – are an auxiliary tool.
- Don't overdo with diversification. Sharing risks is the right thing to do. For this reason, many traders use at least 5 instruments (or more) in the Forex market. But if you quickly move from one poorly studied currency pair to another, then you can make a lot of mistakes. It is necessary to diversify your work gradually – the movement to a new pair should be done after fixing stable results on the previous one. You can start with 2-3 instruments with high volatility. It is better to keep exotic pairs (GBP/TRY, EUR/SEK, etc.) for later.
- Don't try to earn more. The desire to make a large profit in a short time leads to the fact that the trader opens several transactions with a large volume. Such actions dramatically increase the risk of losing a significant part of the deposit. The chance to close one position in the plus is – 50%. With two transactions – 25%, with 3 orders with a large part of the lot, the figure drops to 13%. As a result, the desire to make money faster has the opposite effect. The best tactics – are moderate risks and stable results.
- Control emotions. If a trader intends to increase his deposit, then he needs to ignore the fear of losing money and the desire to recoup after a failure. These emotions have nothing to do with trading logic and strategy.
- Determine the amount of loss for a month. This figure should be divided into weeks and trading days. If a trader can afford to lose 3,000 USD per month, then he must stop trading after a loss of 750 USD per week. In this case, daily losses are limited to 150 USD. Some brokers have special programs that allow you to set up automatic blocking of trading when the set loss limit is reached.
In general, any strategy should be tested on minimal sums, working out all facets of the trading algorithm. Only when a stable profit appears, you can increase the lot size.
It is also important to remember that the risk should not go beyond 20% of the deposit size. If the volume of all open transactions exceeds this figure, there is a possibility of losing most of the deposit or all funds.
The recommended ratio of stops to take is 1:3 or more towards take profit. With this kind of trading, one transaction that closed in the plus is enough to cover losses from three minus positions. This is because the take size is 3+ times larger than the stop size.
With 34% successful transactions and 70% unprofitable transactions during the month/quarter, the trader goes to zero. Anything more is a net profit. When the take is 5 times larger than the stop, then one successful transaction compensates for the loss of 5 unprofitable positions. If you choose the instruments and entry/exit points correctly, then you can get a stable profit with this ratio.
Fixed fractional method of money management
The essence of this money management method is to determine the percentage of the deposit that can be risked within one transaction. The trader sets a fixed proportion of all funds, for example, 2% or 5%. After that, he trades with this limitation.
- an indicator of 5% was chosen;
- the deposit is $1.3 thousand
Then the risk is calculated as follows: 1,300*5%=65. That is, $65 can be used by opening 1 position.
Calculation of a part of the lot:
- The stop loss at 5% risk is 1,000 pips – 100 points.
- The point price is $1.
Then, when using the fixed fractional method, the calculations will be as follows: 1300*5%/(1,000*1)=0.06.
The trader can act as follows:
- when opening a new transaction, he chooses a fixed volume of – the 0.06 lot;
- when the deposit increases by 2 times and the balance is $2.6 thousand, the player will open positions with a 0.12 volume of the whole lot.
There are trading systems in which the stop loss indicator (1,000) is replaced by the maximum amount of losses for a certain period.
- the biggest loss for the last 1,000 transactions was 250$;
- in this case, the fixed part of the lot is calculated as follows: 1,300*5%/(250*1)=0.026.
If you round it up, it's 0.03, but you can also choose a safer way by setting a 0.02 part of the lot. In the fixed fractional method, this indicator remains unchanged regardless of the level of effectiveness of the strategy and various market situations. That's why it's called fixed. The size of the deposit share for each transaction changes only with the growth of the amount on the balance sheet.
Such strict rules are not effective in all situations. For this reason, it makes sense to supplement the classical method with its other variations.
Net fixed fraction
This is a slightly modified classic version. Its essence boils down to adding the minimum part of the lot when increasing the deposit by a certain amount.The growth figure, after which the transaction volume changes, is determined by the trader himself.
- the deposit size is $2,300;
- the trader uses a 0.01 lot;
- according to his strategy, he adds a 0.01 lot after the balance increases by 800 $.
As a result, as soon as the deposit size is $3,100, the trader will start entering into transactions, choosing a 0.02 lot. When the figure of $3,900 appears on the balance sheet, the transaction volume will be 0.03 lot.
Such a deposit management scheme allows you to significantly reduce the capital drawdown with a small number of profitable transactions. The player simply will not increase part of the lot while the statistics have a negative bias. Less transaction volume is – less amount of losses is.
This method should not be used blindly, since the growth of the amount on the account may be replaced by a drawdown. In this case, you need to return to the original lot. If this is not done, the stops will take too much money.
Another problem – is a long-term trading at minimal volumes in anticipation of the deposit growth to the desired level.There are no constant profits in working with Forex. A certain percentage of transactions will be inevitably closed in the minus, « "cutting off" « different levels of shares from the profits made. And the less money is on the account, the greater the percentage of the deposit you need to receive in the market to restore capital. Not to mention its increase.
Starting from 10% losses, the size of the recovery profit begins to increase rapidly. For this reason, it is important to be able to keep your profit.
How to protect profits
One of the best ways to keep your profits is to reduce risks faster than they increase. It is about the reduction rate.
This method is based on two important principles:
- if the number of losing transaction within the last trading period increases, the trader reduces part of the lot;
- the greater the loss is, the smaller the volume of the new position is.
Players often use one level of risk when trading, for example, 10% of the deposit. But if you work with such a volume, when most of the transactions are closed in the minus, then you can incur significant losses.
The table shows that the trader risked a tenth of the account. The amount on the balance sheet was decreasing, and he adjusted the figure taking into account the losses. But still his losses turned out to be significant – the deposit decreased from $9 thousand to $3.4 thousand. Now, to restore the previous amount of capital, you will need to extract 200% of the profit from $3,486.
When using the reduction rate, the result will be different. For example, you can take the reduction of a part of the lot after the first unsuccessful transaction. For each new position, the volume is used 30% less than in the previous one.
With 10 losing transactions, the deposit size remained at $6,760, instead of $3,486, as in the previous example. The final capital drawdown was 33%, and to recover losses, you will need to make a profit of 45% from the deposit body.
Risk reduction ahead of its growth is beneficial for 2 reasons:
- Effective limitation of the volume of losses. Sometimes the strategy gives negative results. During normal work with the market, the player will look for the reason and continue to trade the usual part of the lot. By choosing a reduction rate, the trader will begin to reduce risks at the first signs of serious losses, preventing even larger losses. He will look for gaps in the trading algorithm and eliminate them with a significantly smaller part of the lot in positions.
- Ability to apply an aggressive style when trading conservatively. Some players are afraid to boldly work with the market because of the risk of significant losses. Using the reduction rate, the trader will be able to trade aggressively, because when closing several positions in the minus, he will immediately reduce the level of risks.
The main idea of this system – is to quickly interrupt heavy losses with a large number of losing transactions going in a row. As a result, the received profit is not "burned" in a short time in an unfavorable market situation.
Modified reduction rate
The method of anticipating the growth of risks by reducing the part of the lot is quite effective. But only when lossing transactions follow each other, forming a continuous line of trading failures. If the minuses alternate with the profit, such a system does not give a tangible protective effect.
For this reason, traders use a modified version of the reduction rate – the system balance curve. To use it, you need to build a moving average according to the deposit balance.
As long as the balance line is below the moving one, a rate reduction is used. When the balance rises above the indicator line, the standard part of the lot can be applied.
For a more flexible use of this method, it is worth adding an oscillator calculated according to the balance line data:
- When the green line, reflecting the deposit size, crosses the red moving average in the fall direction (point 1), the rate goes down.
- So the trader trades until the moment when the oscillator comes out of oversold (point 2).
- From this moment, the player begins to gradually increase the lot size. Such trading continues until the amount of capital reaches the previous level (point 3). Then the standard logic of choosing a part of the lot is used again.
As soon as there are noticeable losses and the green balance line crosses the moving average from top to bottom, the trader again begins to use the lot reduction according to the reduction rate method.
As a result, the deposit protection method is activated only in cases when it is needed. At the same time, the return to the standard part of the lot occurs as quickly as possible and without unnecessary risks.
One of the standard options for using such a scheme: the reduction rate is 2 times less than the increase rate. For example, if a 0.7 share reduction is used during a drawdown, then a step of 1.5 will be applied during an increase.
Each trader selects these figures for himself. These may be parts of lot 0.03 and 0.06. Thus, a rapid reduction in losses alternates with an even faster increase in trading volume.
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