Tuesday, October 2, 2007

Diversifying Forex Trading

The critical difference between who will win and who will lose in the business of Forex market trading is learning how to manage your money. For example, if 100 Forex traders begin trading by using a system with 60% of winning odds, only about 5 of those traders would see a profit by the end of the year. Despite those 60% winning odds, only 95% of those Forex traders will lose because of poor money management skills. When entering a trading system one must have great money management skills in order to succeed. Traders enter the Forex system to make a profit, after all, not to lose money.

The amount of money you will put on a trade and the risks you are willing to accept for that trade is money management. It is very important to understand the concept of managing money and to understand the difference between managing money and trading decisions, in order to diversify your Forex trading strategies. There are a number of different strategies that can be employed that will aspire to preserve your balance from any high-risk liabilities.

To begin with an understanding of the “core equity” is a necessity. Basically the core equity illustrates the starting balance of the account and what amounts are in the open positions. Your money management will greatly depend on this equity so it’s very important to understand the meaning of core equity. For instance, if you have an open account with a balance of $5,000 and you enter a trade with $1,000 your core equity will be $4,000. If you enter another trade for another $1,000 then your core equity would be $3,000.

From the outset, it’s best to diversify trades by using several different currencies. By only trading one currency pair, you will generate very few entry signals. For example, if you have an account balance of $100,000 and have an open position for $10,000 then that makes your core equity $90,000. If you choose to enter on a second position, then calculate the 1% risk from your core equity, but not your starting account balance. This would mean that the second trade would not exceed $900. Then if you decide to enter a third position, with a core equity of $80,000 then the risk from that trade should not surpass $800. The key is to diversify the lots between all currencies that have a low correlation.

For example, if you want to trade EUR/USD and GBP/USD with a $10,000 (1% risk) standard position size in money management, then it would be safe to trade $5,000 in each EUR/USD and GBP/USD. This way, you will only be risking 0.5% on each position.

When trying to diversify your Forex trading strategies, it’s very important to understand the strategies of the Martingale and the Anti-Martingale. The Martingale rule means: increasing your risks when you’re losing. Gamblers worldwide who claim that one should increase the size of a trade even when one is losing have adopted this strategy. Basically, gamblers use the rule in the following way: bet $20, if you lose bet $40, if you loose bet $80, if you lose bet $160, if you lose bet $320, etc.

The strategy is to assume that if you lose more than four times, then the chances to win become bigger and as you add more money, you will be able to recover from your loss. Although there are many people who choose to use this strategy, the truth is, the odds are still the same 50/50 regardless of the previous losses. Even if you lose five times in a row, the odds for your sixth bet, and even for those there after, are still 50/50. This is a common mistake made by those who are new to the trading business. For instance, if a trader started with a $10,000 balance and lost four trades of $1,000 a piece for a total of $4,000 then the traders remaining balance would be $6,000. If the trader thinks there is a higher chance of winning the fifth trade and increases the size of the position four times, enough to recover from the loss, then if the fifth trade loses the trader will be down to $2,000. A loss like this can never be recovered back to the $10,000 starting balance. No experienced trader would use such a risky gambling tactic as the result is negative - losing all the money in a short period of time.



Post a Comment

Subscribe to Post Comments [Atom]

<< Home

Ferretti Yachts
Free Web Page Counters
Ferretti Yachts