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Forex: money management principles
Written by: PaxForex analytics dept - Wednesday, 12 December 2018 0 comments
Successful investments in Forex require a favorable combination of three essential components for a currency trader:
• strategy of justification and execution of transactions in Forex (trading system);
• control over trading capital (risk control system);
• psychological and emotional training (motivation and self-control).
The main objective of the Forex trading strategy is to ensure that profitable currency trading is carried out to increase the cash balance on the trading deposit. The main task of control over trading capital is to minimize possible losses when a trader makes transactions in Forex. The main task of a trader’s control of their emotions is to reduce the emotional component in the processes of making and implementing trading decisions.
Obviously, all these components, which together ensure the achievement of commercial success in Forex, have one common goal - to increase the trading capital owned by the Forex investor by maximizing the total of profitable transactions and minimizing the total of loss-making transactions. The basis of such multiplication is the capital management system, designed to limit the financial risks associated with the process of making currency trading in Forex.
How to save trading capital in a financial risk situation
All the variety of methods and tools for managing trading capital practiced by the majority of “remote” Forex speculators can be reduced to a system of strict rules and limits designed to limit or neutralize the influence of those
factors that could cause actualization of risks that imply a high probability of financial losses.
The most effective way to limit financial risks in forex trading can be considered the practice of defining and subsequent modification by a trader of protective orders involving a delayed action.
Such protective orders are known to be of two types:
• stop-loss (automatically completes a deal if the market, moving in the opposite direction of the trader’s direction, reaches the corresponding price mark);
• take-profit (automatically completes a deal if the market, moving in the direction that coincides with the vector position of the trader, reaches the corresponding price level).
In addition, the terminal program for Forex trading often allows the investor to use the trailing-stop tool, moving the stop-loss at a certain distance from the course changing in a particular direction.
Important rules that allow the Forex trader to save trading capital from possible losses:
• do not involve all trading capital in making one or several transactions at the same time;
• reinvest profits received from successful trading (part of the profits can be withdrawn from the trading deposit, and some can be left for use in further trading);
• it is reasonable to diversify currency pairs when opening and holding multiple positions at the same time.