When developing your own trading strategy, you can’t ignore the issue of money management strategies. Only when you have decided on a budget – its size, acceptable risks, etc. – should you begin. Let’s see what the leading market experts recommend in this regard.
Capital management strategies in Forex
The main rule: the risk of any transaction in Forex must not exceed 1-2% of capital. That is, with, for example, $25,000 it is acceptable to lose no more than $250-500 on one position. Leading traders are usually limited to 1%.
This money management strategy is a priority when making decisions about entering or exiting a position. If the probable loss exceeds the level determined by the trader, the trade should be abandoned. As the balance increases, the size of both risk and profit will increase. And vice versa. As the balance goes down, these figures will correspondingly go down.
However, no matter how the trade develops, the specified percentage of risk should not be changed without a reason.
The higher the balance of the trader, the lower percentage he prefers to use. With a million dollars in the account, it is not very justifiable to invest $10,000 in each transaction. That’s why professionals who play big prefer to determine risks as a fixed amount rather than a percentage.
Money Management In addition to the risk limit discussed above, money management strategies often include other limitations.
- For instance, it can be setting a limit of losses for a trading session.
The presence of such a barrier allows timely “jumping” if the specified period is not too successful.
- Quite popular method is limitation of profit share loss.
Trading will be stopped immediately after losing a certain part of the money earned during the session. Thus, the trader protects his profitable day from a too minor ending.
Trade on several positions
Opening of several positions at the same time is a quite common phenomenon for most traders. The money management strategy provides for the obligatory regulation of such trading. Having a scenario of behavior when several positions are opened simultaneously will greatly simplify trading and save precious time.
Of course, it is impossible to formulate recommendations for each specific situation. However, certain general provisions can always be formulated. For example, if there is correlation, it is acceptable to open two positions, each at 1% risk, but you should exclude transactions involving third assets with which the pair also has a stable relationship.
Whatever money management strategies you use, the most important thing is to fulfill the main objective – to limit the risks in a reasonable manner.
As for the percentage, the experts recommend using the same 1% of the total balance, regardless of the number of positions. This amount of risk rarely allows opening more than five trades at a time when it comes to stock trading. In the case of futures, currency pairs and binary options, their number can be greater.
It is worth calculating 1% of the initial balance even if there are already open positions. Active trades change the size of the deposit, so 1% will not be a static value.
Capital management strategies for trading stocks
Let’s look at an example of a fairly standard transaction. Let’s say you start work with $25,000 of start-up capital. The size of the maximum risk in this case will be $250. Financial Strategies As you analyze the market, you find a stock at $20 whose parameters match the entry rules you have defined.
Let’s say the stop loss for this position should be $17. To be sure that the risk is justified, you should evaluate the profit potential. If your target is the $26 level, then it turns out that you risk $3, while the profit in case of a successful transaction will be $6 per share.
Thus, we have a ratio of 2 to 1.
It’s not difficult to calculate how many shares you can buy in order to keep the risk tolerance at $250. A similar amount can be lost if the size of the shareholding is 83 units. However, this does not take into account brokerage commissions, it could be about $3. In this particular case, 83 shares could be purchased for a total of $1660. With a $17 stop loss, the risk would be $250, not including commissions. If an exit from the position is used when the target profit is reached, set the required level immediately.
Further management of the trade is carried out in accordance with the exit rules defined by the trading strategy. The same applies to parallel entry into new positions.
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