Money and risk management - Trade forex smartly and protect your investment
Money and risk management - Trade forex smartly and protect your investment
Money management can be defined in easy words as the process of organizing your money. It can also consist of banking, budgeting, investment and the taxes. Money managing system comes under the subset of the forex trade plan which takes control of how much risk to take when you receive a signal from the forex trading system.
This is simply one of the finest money management technique implemented by many expert forex traders is to always risk a fixed amount of your equity per position. By the means of this process a trader slowly increases the size of his trades while he is winning and decreases the size of his trades when he is losing. This can be done by rising the volume of bets during a winning streak permits for an ultimate growth in the terms of monetary gains. By just reducing the volume of bets through the losing streak will automatically decrease the damage to the trader's equity account. You can easily watch the interactive display of this method by switching on the forex trade simulator.
Forex trading permits to grow your cash account over a time period - or generate it to grow geometrically. The geometrical money growth is generated when the gains are reinvested into the trade leading to the steady larger positions being taken and accordingly, to bigger profits and the losses. The speed in which the account grows is managed by the volume of the profits and by their regular occurrences which should always be kept in mind by forex trading system developers. While the geometric equity growth should be even and steady, but some brokers try to speed it up by artificially increasing the bulk of their gains by endangering their very large amount of the account. Since the actual series of the losing and the winning trades can in no way be guessed in advance, so such practices and efforts go in vain and they result in a very erroneous trading performances and big equity fluctuations.
This may seem very glamorous for the outsiders or the novices but this is certainly not the case always. Trading on the foreign exchange market can really be a huge profitable business. When equipped with all these details some traders start determining how to create huge amount of money in a very less time - by putting into risk too much amount. In simple meaning, their only aim is for the quick and fast growth of their financial needs with no consideration for the smoothness or geometry of the equity curve. When these are done forcefully and invariably it results in severe drawdown's or complete wipe-outs as it can be easily seen if you put in values greater than ten as the percentage put into danger in the forex trading simulator (a trader's software) which deals with a few equity situations with this setting. To risking a very huge sum of your account money can indeed have drastic result on the geometric growth of your account balance for a short term period. Nevertheless, the winning streaks (which are quite longer) are generally always followed by the losing streaks for shorter intervals.
Among all the other practices involved this practice certainly betrays the trader's sense of confidence in the trading system's longer profits. If the trader is very much confident about his style of profit making then he can very easily make huge amount of profits from the trading system risking smaller amounts of his bank account on every trade and simply observe the system realizing its potential. It must be noticed that simply the geometric money growth permits to make usual profit gains from an account as a certain amount of the equity. Both of the features of money management such as the good money management and an efficient trade system are necessary for a smoother rate of money growth. The speed and the smoothness of the account's growth depends a larger extent on how much amount you risk per trade as being set by the money managing system and on the trading system's precision, accuracy and the payoff proportion parameters .
Apart from managing the equity variations by setting a permanent proportion of the money to be put on any trade, the money and risk management system can also decrease equity swings by means of diversification which is again a very effective strategy.
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