Forex money management what is it? Consider the rules and tools of capital management

Many traders in moments of failure in the market, the question arises: “what am I doing wrong?”. It would seem that the trading strategy is effective and tested by time and thousands of traders, the conditions of the broker are ideal and as comfortable as possible, but the profit still does not go, only losses. The main reason in such cases is the trader’s lack of the concept of money management. What is it and how to improve your trading thanks to simple rules, we will consider in this article.

What is money management in Forex?

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Money management and risk management in the financial markets are closely related and “in cooperation” can improve the profit margins of almost every trader. What is risk management in trading? This is primarily the minimization of possible losses, while money management has its own task, and we will talk about it in a little more detail.

Forex money management is a special distribution of finances in such a way that it is possible not only to minimize possible risks, but at the same time increase possible profits. In simple words, this is the ability of a trader to make a profit almost always, even if the number of trades with a loss is approximately equal to the number of trades with a profit. Money management is an indispensable tool for every professional trader, as it is a component of successful and, most importantly, effective trading strategies.

Money management rules

Of course, novice traders most often suffer from the lack of money management. They hunt for strategies that promise 90% profit, and in the end only lose money on them. While experienced traders choose strategies that have a slightly lower percentage of profit (for example, 60-70%), but they get a stable profit. It turns out that they have a radically different approach to trading and money management.

It is worth remembering that the market is a rather chaotic and uncontrollable thing. And such chaos can be overcome only with the help of order. However, universal money management in trading cannot be deduced, but it is possible to single out general rules.

  • Rule #1 Don’t keep your eggs in one basket. Only the lazy did not hear about this rule, but this does not negate its relevance. At the same time, the rule is quite universal – it can apply both to trading assets (do not use only currencies, study new markets), and, for example, to different strategies that can competently complement each other.
  • Rule #2 Know when to stop. Your losses should not go beyond the limits that you set for yourself in advance. Excitement is good, but in moderation, there is no need to be afraid to close a deal or run thoughtlessly to open a new one simply on the desire to “recoup”.
  • Rule #3 Trite, but be sure to use stop loss and take profit. Even when it seems to you that the position is going in the right direction, even if there should not be any reversal in the market according to the forecast, it is better to play it safe and cover the rear, and the stop loss is a protective order.
  • Rule #4 Do not risk more than 5% of the total deposit. This is an unspoken rule of traders, such a percentage of losses helps to keep your head as cool as possible, which means creating the right emotional background for trading – you will be less prone to stress and hasty decisions against its background.
  • Rule #5 No need to go for broke. If you notice a favorable situation on the market, you don’t need to rush in everything at once and open huge positions. It is better to enter a trade with a small lot, and after the forecast is confirmed, add or open a new order in the same direction.

No one can give a 100% guarantee that following the rules of money management will completely save you from losses, but it has significant advantages:

  • Financial security and no critical losses. By following simple rules, a trader can maintain a stable position in any market situation, as risks are controlled.
  • Reducing stress. Compliance with risk and money management helps to reduce mental stress and stress levels, as it reduces the chances of trading on emotions and the desire to win back in case of failure. Due to this, incorrect trading decisions and losses are minimized, in addition to what the trader was already ready for.
  • Increasing profit. Thanks to the observance of the rules of money management, a trader’s trading in the financial markets can become more successful, forecasts – more accurate, and decisions more verified.

Forex money management using Excel

There are a large number of special calculators that are designed to help a trader in trading. However, you can create your own Forex money management calculator – for this you only need any Excel (on Google Drive or a real one) and a few minutes of your time. Once developed a table, and in the future it will be a good addition to your trader’s diary.

It is worth starting by entering basic data into the table – the size of the deposit and the planned amount of risk in percent. After that, you can make a formula that will help calculate the amount of risk of the entire deposit used – in the example below, the calculation is made according to the formula:

Lot size to risk = deposit size * risk percentage / stop loss size in pips / pip value

In practice, it will look like this: $1,500 * 1% / 200 pips / $1 = 0.05

0.05 is exactly our lot size for opening a position.

You can download the Excel file for risk calculation – here

For basic calculations, such a file is enough, but it will not always accurately calculate the risk, since it does not take into account the specification of the contract of the traded instrument and the characteristics of your brokerage account.

For a more accurate calculation, further, we will talk about automatic calculators that you can download and install for free in the MT 4 or MT5 terminal and not bother with risk calculation.

Money management with trading panel

Money management in trading is a moment that should never be forgotten. And even if you don’t have an Excel tablet and your own trader’s diary at hand, you can use a special trading panel with which you can calculate the risk in% of the deposit and in the account currency in one click.

Thanks to EasyTradePad, you can calculate the risk before opening a trade right on the chart by simply dragging the SL and TP levels with the mouse. For the convenience of the trader, you can save the desired sets with a predetermined risk amount and simply open market or pending orders in one click.

A lot of training videos have been shot about the panel, you can find detailed information on the button below. There are versions for MT4 and MT5.

Risk Management Forex Strategies

Risk management is a special set of rules for traders aimed at reducing losses. This includes a wide range of actions: from a comprehensive analysis of the market and its constant monitoring to its own emotional control. However, there are several interesting strategies for risk management. Let’s take a look at some of them.

Martingale and its varieties

The so-called “rate system” was invented long ago, back in the 18th century, but has not lost its relevance even now. This strategy is actively used by traders from all over the world. In simple words, Martingale is the opening of new orders in the same direction and using double the volume in case of fixing a loss until a profit is fixed. Those. the principle of a geometric progression is used: 1-2-4-8 and so on. As soon as the profit is received, a new transaction is opened with the initial minimum volume.

There are several varieties of Martingale, but we will consider only two:

  • Pyramiding. The only difference from the standard Martingale is that a trend trade is doubled not in case of a loss, but in case of a positive result.
  • Reversing. As in the classic Martingale, a new deal has a doubled volume and is opened in case of fixing a loss, but in the opposite direction.

Forex safe rule

Instead of one general transaction, the working volume is divided in half, after which 2 transactions are concluded at once with a volume of 50% of the standard one. Stop loss and take profit are set as usual. After the chart passes about 30% of the distance to the Take Profit level, the first trade is closed. After that, only half of the volume remains in action in the market. Stop at this moment is transferred to the level of order opening.

This reduces the risks to almost a minimum, because even if the chart does not reach the take profit level, the Safe rule protected your deposit and ensured profit. However, it has one unpleasant minus – in cases where the take profit still works, the total earnings are reduced by about 33%.

Trader’s trading plan

A trading plan (or trading diary) helps a trader stay disciplined and monitor how the trade is going and whether the risks are exceeded. A plan can also help you test which strategies or methods are working and which are not.

An important part of a trading plan is the identification of risks. Professional traders prefer to determine acceptable risks and losses not for one trade, but for a day, a week or even a month. For long-term traders, the risk level for the year can also be determined.

Risk Manager Expert Advisor for MT4 and MT5

To achieve maximum management efficiency, you can install a special advisor-program that will help control the risks of a trading account. The program can do this both in monetary terms and in percentage terms.

The adviser works simply – it is attached to the current chart of the currency pair, after which the trader needs to set the risk values that he is ready to take with the current balance. You can install the program on the VPS, and work on your home computer.

The program calculates risks for a specific trade, for a day, for a week and even for a month. But besides this, it can also help you determine the maximum allowed trading lot, the number of orders per day and the maximum profit per day, and much more.

Money management books

If you enter the query “money management book” into any search engine, it will give you a huge number of results – from offline and online purchases to reading directly from the site and any device. It is impossible to single out one “encyclopedia” of money management that can solve all your problems and questions at once. Therefore, it is best to choose those that catch you with their description and look the most suitable for your needs on an individual basis.

But popular are, for example, “Mathematics of money management. Market Analysis Methods for Traders and Portfolio Managers, Vince R., Beating Wall Street by Peter Lynch, Understanding Risk. How to choose the right course “Gerd Gigerenzer.

Summing up all of the above, let’s highlight a few important points necessary for optimizing trading. Just a few steps will help improve your performance, but only if used correctly.

  • Do not forget about the risks – calculate them for each trading operation – as a percentage or in a currency unit. Trader’s calculators will help with this. Do not forget about the risks for the day, week, month – you need to consider everything.
  • Determine in advance the amount with which you are ready to part in case of something.
  • Use stop loss. This is a prerequisite for reducing losses.
  • Eliminate emotions, trade with a sober head.

Following the rules of money management in Forex will help you achieve heights in trading.

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