Basics of money management

Truly professional currency trader from amateur distinguishes systematic adherence to the rules and laws of Forex. Decisive importance in this regard is the strict observance of the basic criteria for managing capital. Theoretically, all of them are quite simple and can be reduced to a few ways to prevent risks and mechanical approaches to the management of their own deposit in the market. The main difficulty - not to deviate from these rules in practice.

The purpose of the foreign exchange market can be summarized as follows - minimizing costs and increasing revenues. Somehow new traders always prefer to plan and calculations is the last indicator. Speculate about possible losses nobody wants.

In this case, the potential loss of large size can easily lead to the bankruptcy of the trader on the exchange, or to even more disastrous consequences. How to learn to make the right decision? Preferably, avoiding a loss or risk, which provides a chance to break a big jackpot? Most beginners choose exactly the latter approach, but how justified such a choice?

For a really long-term work on the foreign exchange market it is imperative to minimize losses, and not getting a high income. This statement is supported by the following mathematical principles:

• regular growth and increase the amount of deposit at Forex Capital increases dependence on each subsequent reduction percentage;

• reimbursement of losses always requires a much larger percentage of profit.

Consider a situation in which the amount of the initial deposit novice currency trader was 10 000.00 U.S. dollars. For three years, this market participant could achieve stable earnings at 30% per annum. After successful completion of the three-year cycle of the deposit was 21 970.00 U.S. dollars. The total increase to the original amount of the deposit is 3 * 30 = 90%! Great result.

But if you imagine that soon the trader will incur a loss in the amount of, for example, 70% of the amount of its deposits decreased to the level of U.S. $ 6 591.00. As a result, there is a real loss , because its interest is calculated on a much larger amount than in the beginning. Especially painful losses are at times the most significant correction of the leading world indices.

Simple math shows that to cover 50% of losses requires 100% profit. And to compensate for 33% loss-making necessary profit figure at around 49%. That is why most traders aggressive plan designed to get more income and not supported by the rules of money management and risk minimization principles highly undesirable.