How to choose the right volume of trade in the foreign exchange market? Let’s talk about three options – from the riskiest to the optimal for a beginner.
Perhaps, every newcomer who has come to the foreign exchange market has heard about money management. It would seem that difficult to manage money? However, not one trader lost all his money due to improper management.
The methods of money management are extensive enough to consider them within the framework of one article – today we will focus on three ways to enter the market, and more precisely – on the size of the position to be opened.
METHOD NUMBER 1. “FOR THE WHOLE CUTLET”
The name of the method comes from the slang name of the bundle of banknotes. The essence of the “For the whole cutlet” method is to open a transaction with the maximum available volume without placing a stop-loss order.
The benefit of this approach is obvious – with a large amount of leverage, you can get fabulous profits in a short time. And if you enter “the whole cutlet” several times, the deposit will generally grow exponentially.
Immediately, we note that this method has nothing to do with real trading, but is more suitable for gambling.
Of course, you ask why? Let us explain with a simple example:
- Your deposit is $ 100.
- Having opened a deal “for the whole cutlet”, you made a profit of $ 200 – your deposit is now $ 100 + $ 200 = $ 300.
- Entering the market with a deal for $ 300, you again made a profit, but already $ 400. Accordingly, your deposit is now 300 + 400 = 700 dollars.
- With the next deal, already at $ 700, something went wrong, the price went against you. As a result, your deposit amounted to 700 – 700 = 0 dollars.
METHOD NUMBER 2. FIXED TRANSACTION VOLUME
This way to enter the market is that each transaction is opened with a volume depending on the size of the deposit. Moreover, if the deposit increases, then, accordingly, the volume of opened transactions increases.
For example, the following correspondence is established – 100 dollars corresponds to 0.01 trading lot. That is, if the deposit is $ 1,000, then transactions are opened with a volume of 1000/100 x 0.01 = 0.1 lots.
Suppose, as a result of a number of profitable transactions, the deposit grew to $ 1,100. Accordingly, the next transaction will be 1100/100 x 0.01 = 0.11 lots in volume.
The fixed volume method is widespread because it saves the trader from calculating risk parameters for each opened transaction.
METHOD NUMBER 3. DEPOSIT DIVISION
The method of “Dividing the deposit” is to split the existing amount into several equal parts and use only one of them.
It is best suited for those who do not know how to fix losses and manage their risks – it does not matter if it’s newcomers or traders with some experience. And all because, for this method, the key factor for making decisions is not profit, but loss.
For example, you have $ 1,000 that you decide to use for trading. You divide this amount into 5 equal parts and open a trade deposit in the amount of 1000/5 = 200 dollars (20% of the principal amount). The remaining 4 parts of your money ($ 800) remain in your pocket (electronic wallet).
You calmly trade on this deposit. Did you manage to double the deposit? Withdraw profit. If the deposit as a result of your trading has ended, then open the next deposit in the amount of 20%, but from the remaining amount. That is, your new deposit will be 800/5 = 160 dollars. Have you leaked this deposit? We open one more, but now at 640/5 = 128 dollars.
Thus, you will learn how to fix your losses and not allow the complete loss of all your money. Having learned to record losses in the amount of 20% (and for someone it can be 15% and 10%), you can already manage to trade the entire amount available.
Probably, we talked 1000 times, but we are not too lazy to say it 1001 – always remember that without observing the rules of money management at Forex, profitable trading is simply impossible.