Money Management Principles

Jobs in the financial markets is impossible without forex trading company, trading platform and an effective program of placement. Firmly following the equitable relationship between the amount of income and the amount of losses per average trade, the trader is able to work with money, not play.

  1. General investment amount shall not exceed 50% of the total capital.

According to this rule, the total amount of funds (margin) for all open positions must not exceed the 50 percent threshold. This will keep the legal reserve in the event of unusual situations and continue normal operation.

  1. The total amount of money invested in one market may not exceed 10 – 15% of total equity.

This eliminates the possibility of investing excess funds in a deal that could wreak havoc if the deal would be unprofitable (after all, the risk of loss is always present).

  1. The rate of risk for each market in which a trader invests his funds should not exceed 5% of the deposit.

Thus, this principle determines the amount that the trader is willing to lose in the event that the transaction will be unprofitable. Again, some analysts believe that this barrier should be at 5%, and 1.5 – 2%.

  1. The total amount of guarantee fees paid at opening positions on the same group of markets, must not exceed 20% – 25% of the deposit.

Markets included in one group move more or less the same. Opening large positions in every market of one group violates diversification principle, therefore, must be treated very carefully to the placement of funds in similar markets. You can not break the rule of optimal funds allocation: in varying degrees, they have to be diversified. Its capital should be placed so that one transaction losses are not ruined the trader, and, where possible, were offset by profits from other transactions.

On the Forex market are the following group of markets in which the behavior of exchange rates is very similar: the dollar zone, the euro, sterling zone, the yen area.

  1. Determination of the degree of portfolio diversification.

Diversification is one way to protect the capital, but here you need to know when to stop. More or less reliable allocation can be achieved by opening positions simultaneously at four – six markets of different groups or open forex trading accountwith different trading conditions (link).

The variability of the market, the more removed should be the levels of stop-loss orders on the current level of prices.

In the interest of traders to place a stop order as close as possible to the current price level, in order to minimize losses from the losing trades. At the same time too “hard” stop-loss can lead to unwanted elimination of positions in the short-term price fluctuations (noise). However, too remote stop losses, though not sensitive to noise, can result in significant losses.