Every financial market, as well as Forex, carries certain risks that should never be underestimated. And due to risk factors, most professionals devote considerable effort to reduce or, if possible, completely get rid of them.
Money management, also money management, is the approach that helps traders minimize these risks and manage finances so that over time there are no unnecessary losses and pointless threats to trading accounts, which otherwise normally occur without this approach.
The main goal of everyone who decides to start Forex trading is undoubtedly to succeed and make money. Unfortunately, in the beginning, many imagine that in Forex and in the world of trading in general, you can just and wait and fabulous wealth will find its way to you. Of course, this is not how it works, although we do not deny that some true lucky ones managed to get rich this way. On the other hand, most of those who try to do so ended up with empty accounts.
In all these cases the reason is usually similar. For potentially quick enrichment, these people are able to undergo extreme risks and often open large positions. This will soon get their trading accounts to zero and the “game” of finance ends for them at the very start.
To prevent these situations, it’s recommended to follow the money management rules. The first rule of money management is that the trader should never risk more than he can afford and also that the maximum potential loss from an open position should never exceed a certain number of percent of the trading account (usually 2-5%).
Leverage is generally a great help in positively evolving positions and literally a nightmare when open positions are at a loss.
The leverage effect allows the margin to be covered with the help of external funds. For example, a 1:10 leverage helps traders open a $ 1,000 position, even if they only have $ 100 in funding. The already mentioned advantage of such an open position is that if, for example, the value of the exchange rate rises by 10%, the trader gains 10% of 1000 USD (profit = 100USD), but the same applies to losses and therefore it is always necessary to handle leverage very carefully.
Stop-Loss - generally used to immediately close a position once it reaches a certain loss (it will end automatically).
Take-Profit - is a kind of opposite protector of capital, which closes the position on the contrary when it makes a certain profit. The advantage is that the Take-Profit command works in the same way as the previous command, also completely automatically.
Today's last tip, with which it is possible to achieve quality money management, is to select such currency pairs that will achieve significantly different results within the portfolio over time.
To determine whether currency pairs are moving in the same direction over time or not, we use currency correlation. The correlation value is given in the range from +1.00 to -1.00. The closer the value is to +1.00, the more the currency pairs move in the same direction over time, on the contrary, -1.00 means that they move in opposite directions. Ultimately, zero means that currency pairs do not correlate with each other and evolve randomly over time.
From the point of view of risk reduction, it may seem very appropriate that the correlations of traded currency pairs do not become positive, because only in this way is it possible to increase the chances that in case of negative development on one currency pair, the same development will not occur for all other traded pairs.
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