Several general rules of money management
These rules of money management increase the money deposit security and provide secure work with operations with the highest possible profit. In other words they are called The rules of money management. The contemporary trading demands to stick to MM rules strictly without any guarantee of a profit though.
To provide security of money deposit it is necessary to stick to the following rules:
1. Total sum of invested money should not be higher than 50% of total fund. This rule is a foundation of the rule of estimation of margin under the opening of the position. many analytics think that the percent of invested means should be smallest than 5%-30%. It has to be noted, that we talk about the total sum (for several transactions). Thus this rules does not mean, for example, that it is reasonable to put all 50% to one transaction.
2. Total sum of money invested in one transaction should not exceed 10%-15% of total fund. In this case a trader has a guarantee that he will not become a bankrupt. In general, it means: don't put all your eggs in one basket.
3. The norm of risk for each opened position, that is defined by the stop-class level, should not exceed 5% of total sum of money. Thus if a transaction is unprofitable, a trader will be ready to lose 5% of his money. 5% is taken from Murphy works, however, for example, Elder takes 1,5 - 2%.
4. Total sum of deposits to the opened positions in one group of markets should consist of no less than 20%-25% of total capital. It is concluded from the fact that many other currencies behave the same way against dollar, especially after publication of economic news in the USA. That is why to diversify risks it is necessary to world both with currency pairs, that include dollar, and with cross-rates. Under such a condition the losses only in the opened positions will be covered partly by the profit gained from other ones.
There are certain rules that concern stop-loss and take-profit levels setting at the moment of opening the positions. All currency pairs are divided into those with high and low volatility. Most traders work with so-called "intra-day" trading, where the position are opened from 1 to 3 hours. These positions work with general "intra-day" market movement. To leave the position opened for the next day, you should have compelling reasons. The size of currency volatility defines the level of so-called "price noise", that is defined approximately as follows: 24-hours candlesticks are taken from zero-point GMT to zero-point, their size between shadows is measured (the distance between points "high" and "low"), and the given value divides by 24. The experience shows that the minimal value of price noise is approximately equal to 30 points, these currency instruments are called "of low volatility". If the minimal value of price noise is from 40 points the currency instruments are called "of high volatility". For the "intra-day" trading there is no sense to use stop-loss smaller than the price noise value, i.e. the invoiced value of stop-order cannot be smaller than 35 points.
5. The invoiced stop-loss/take-profit balance for one opened position cannot be lower than approximately 1:2; in other words, from mentioned above it is clear that invoiced stop-loss value cannot be lower than 35 points, and the take-profit value, respectively, higher than 60 points. This rule permits to have a small profit on account if the balance of successful and unsuccessful transactions is equal to 1:1.
There is a number of rules that has to be followed in trade operations. Generally speaking, a trader should be highly disciplined and organized to work in Forex, he should use certain systems in his work. Considering the intra-day trading, it is necessary to stick to the following rules:
1. It is necessary to analyze the situation at the market before opening the trade terminal in the beginning of the day. It means you should answer the questions: where are prices situated right now and why, what has happened at the moment when a trader did not track the movement of prices.
2. It is also necessary to meet with economic news calendar for a today. In what time (GMT) what news are published, and can they influence on the market and the movement of prices. The skills in the fundamental analysis are gained only with experience, thus the practical experience in trading is needed.
3. It is necessary to define current strength levels of basic currency instruments, used in trading, and current intra-day price diapason.
4. Using the results of analysis, it is necessary to make a trading plan for a day, that will include: the price limit of entering the market, the stop-loss level, the possible size of profit and, relatively, take-profit level. The conditions of entering the market and its quitting. The price situation, that will be freelance and will require immediate market quitting. It is necessary to understand that you should take into consideration the analysis conclusions in your decision making about entering the market and do not react on current losses in opened and transferred-to-the-next day-positions. It is necessary to make a strict plan of the term of the transaction while opening the positions, and after this term it is necessary to estimate the possibilities of quitting the market before significant changes in prices that can take place after movement during the night.
5. It is necessary to stick to the trading plan. You should answer the question: "What is the reason of entering the market?". The reason should be the combination of coincidence of analysis conclusions with current price situation, confirmed by technical indicators (no less than two).
6. It is forbidden to move the calculated earlier stop-less level in the direction of increase of possible losses, independently of situation. The work without stop levels is regarded to be even more risky.
7. While entering the market it is necessary to take into consideration possible currency rates moves after the publication of economic news. Short-term strong moves of currency rates may break stop-orders, and then the market will follow the direction that was defined by the trader. It is recommended to refuse to open additional positions and to save the current ones within 30 minutes before the publication of economic news that can influence on currency rates to a greater extent. You can do this by moving stop-orders to the point of no losses, or by closing the current positions taking into account the possible rate fluctuation.
The given rules can be used for the preparation to the transaction making and to the process of trading. Now we are going to discuss how you can analyze history of transactions on actual basis and what general indicators should attract special attention except of the growth of deposit or funds.