Many Traders, who are just starting their journey in the Forex market, consider online trading in terms of making constant profit. At the same time, such an important point as the probability of potential losses is forgotten.
For losses not to haunt you constantly, you must follow the rules of money management. The issue of preserving capital is the main goal for the traders. Compliance with all the rules of money management reduces the riskin trading and increases the odds of making money. Some of the common mistakes in capital management are as follows:
Lack of money management
Many traders work without any money management. They think that they can become rich quickly only because their few trades went in profit. So, they overuse the leverage and spoil their whole account by not limiting their risk.
This method of money management is similar to the previous one; the only difference is that traders open several positions at once.
Consider the basic approaches of capital management:
A fixed amount that is at risk.
Having received a signal to open a position, the trader determines the amount of money that he is ready to risk. In other words, the trader fixes the amount that he can afford to lose in the trading operation.
A fixed percentage of capital
The traders who use this money management technique, when they receive a signal to trade, determine what percentage of the total amount of their deposit they are willing to take. For example, a trader does not want to risk more than 1% of his deposit in the trading account. Opening any position, the trader will always limit his losses to precisely one percent.
The coordination of wins and losses when trading
This method of money management is commonly called the “construction of the pyramid” or the “direct or reverse approach of Martingale.” Those traders who practice this method initially determine the volume of trade after winning or losing. For example, having lost a certain amount on a particular transaction, they can double the volume of trade the next time they enter the market to recover losses from the previous transaction.
Risk to reward ratio
Always try to keep your reward twice the amount of risk. In this way, even if you lose 50% of your trades, still your account will grow.
To achieve long-term results to avoid losses in trading, the traders need to follow two main mathematical principles of forex trading:
1. The larger your deposit account or investment portfolio becomes, the safer is your capital because you can allocate certain percentage of your capital at risk while small equity holders may suffer even if they go for the smallest trade volume.
2. Compounding your profits can help you reach your goals easily rather than taking big risks that may end up in losses only. Many novice traders ask the question: what distinguishes professional traders from amateurs? The answer to this question is straightforward; proper money management leads to success and professionalism in Forex trading. You can familiarize yourself with capital management literature further through several online resources.