Many traders, especially the beginner Singapore Forex traders, mostly focus their attention on technical or fundamental analysis of the market. They decide when it is better to enter the market, and when to leave it and absolutely do not think that the main factor that contributes to the success or failure of a Forex trader, is a good money management. You may use either technical or fundamental analysis, or apply both of them when analyzing the market. You can enter the market late, or leave it early, it all depends on your choice of trading strategies, but you can increase your investment only by properly managing your money.
Basic Rules Of Money Management:
1. When entering the market, the first thing you must think about is not the profit but the losses. Learn to control your losses and you will make profit.
Consequently, the choice of the lot, which you use to enter the market should be determined not by the potential earnings but by the potential losses and the probability of recovery of the initial deposit. If, for example, you lose 5you’re your deposit, in order to restore its original value, you will need to gain 5.25% of the outstanding amount on your account.
Experienced traders agree that the maximum loss that can still be gained back is 30%. It is a high risk to return more than 30% losses and in most cases it leads to the complete loss of the whole investment.
According to the first rule of MM, the lot for a trading position must be no more than 10% of your total investment. The smaller – the better. Eventually you came to the Forex market to earn and it is impossible to earn in the Foreign Exchange without a risk. A reasonable risk might be achieved with a help of a stop-loss order.
2. “Stop-loss orders are for cowards” – this is a common expression among Singapore traders, who have no idea what is Money Management. The market is unpredictable, whatever techniques and systems you use, you can never forecast the Forex rates with 100% certainty.
It is necessary to set up the stop loss orders in order to limit the losses. The question is where to place the stop losses. According to the second rule of MM, the stop loss orders must be set no closer than 20-55 pips, but at the same time no higher than 50-88 pips from the price of entry to the market. The level of the stop loss for a particular currency pair is determined by its average daily movement.
The first and second rules generally agree among themselves: the value of a lot to enter the market should be such that in case of a stop-loss the maximum loss must be less than 10% of the initial deposit.
3. The losses in Forex market are inevitable. Successful traders also have losing trades, but their total number of profitable operations exceeds the amount of losses.
In order not to gamble, you must choose the right moment to enter the market. From the standpoint of Money Management, the best moment to enter the Forex market is where the chance for the potential profit is at least two times more than the risk of potential losses. The larger the ratio, the better.
4. Choose the right leverage for your Forex trading. Many Forex brokers offer high leverage such as 1:100, 1:200 and even 1:500. By doing this the brokers want to make their traders think about the profit, not about the losses.
Money Management for proper maximum leverage must not exceed 1:100. It is very high even for Forex. Traders of stock markets would be in terror if they were obliged to trade with the leverage of 1:100. But for Forex market this leverage is acceptable. However, we must remember that this is its maximum value. If your Forex broker offers you a lower leverage, it is better to use it.
The Money Management rules discussed above seem very simple. But, nevertheless, they are not applied by 95% of all Forex traders. As a result most of them loose their investments in Forex market. Learn how to manage your capital and you will be among this 5% of those who gain.
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