Management of Capital and Risk Distribution Rules
To trade successfully in FOREX it is not enough using your skills in fundamental factors or doing technical analysis. Both of these are very important, but often the main factor becomes your skills to distribute your resource as well as it is possible. Very often to make profitably trade traders needs some little trifle as couple of hundreds biggest deposit in your account and traders have to leave the market with loss, and then the market turn around in his way. In purpose to avoid these situations you should know some special management of capital rules
These rules answers to question like: where and how much you can invest, how much your capital in percents you can lose in bad trade, how to optimize your profit. So here it goes.
First of all you should not have opened bigger positions in sum of all 30% of capital. Second: to open position for one currency you should not use more than 5% of initial margin. And third, your loss in one position has not to be bigger than 5% of your current capital.
All traders and dealers approve opinion that capital management rules are more important than technical or fundamental analysis. In other articles on internet I saw that the main thing off these rules is the last, because then your loss exceed 5% of your capital, your loss grows not in arithmetical progress but in geometric progress, and to get your lost money, you should have a lot of luck or to increase your capital. That limit set all traders for him selves and it can be from 1 to 5 %, subject to the market and trader character.
Of course all trades keep the opinion that you should lose less and earn more. If you lose a bit, but you know that you soon reach a profit, and get back you money, you do not be scared of the market. But if you know that there is your last money and the smallest moving of the price can burn your account down you will be scared by the market, and may be you do not make a new deal to get your money back.
There is one risk reduction and capital management techniques - a profit and loss ratio principle. This principle states that its profits and losses need to plan a certain proportion. Statistics show that even the most experienced and successful traders accompanied by only 40% of the transactions are successful. So 60% of transactions are loss. The question is how the profits from the third transaction can and should cover the losses from the failure of two thirds of transactions? Minimum profit and loss ratio should be less than 3:1. In other words, if you plan to get 60 points profit, the loss should not exceed 20 points. If you planned to get 100 points profit in proportion to the damage threshold can be increased up to 33 points.
Another equally important principle of trade, especially if you are losing: do not ever try to double positions and "lean back" if you see that you lose. Double only those positions those are profitable. And finally, what if you "Lost"? Experienced traders advice - the best to relax, get out of the market, try to analyze the situation: what was wrong (where, when and why). Only after doing this, you have the opportunity to actually recover your money. It is very important in market the concept of protective measures - protective order - stop. Security measures are two types - a stop order (called stop loss), or out of position with the loss and profit. Security measures are designed to - to minimize losses and to guarantee a minimum return. Looking to your trade (or labor market) plan, you must accurately determine the loss limit and closing the positions (when the situation is developing favorably) levels. Security measures - a necessary component of successful trading and it is necessary to use all of them to get profit, and to have smaller losses.