Work in the financial markets is impossible without an effective programme of the placement of funds. Effective money management allows the trader to "survive" in markets with margin trading. Only by respecting equitable ratio between the sum of the profits and losses per one average deal, the trader gets the opportunity to work with cash and not play. Let us consider the General principles and rules of capital management.
1. Total amount of invested funds shall not exceed 50% of the total capital:
This principle establishes the rule of calculating margin for open positions: the size of the compulsory reserve for use in non-standard situations and continue with normal operation should not be less than half of the total capital. The figure of 50% is given Murphy, however, many analysts believe that the percentage of investments should be even smaller: 5% - 30%.
2. Total amount of money invested in one market may not exceed 10% - 15% of the total capital:
In this case, the trader is safe from excessive funds investment in a deal that could lead to ruin.
3. Norm of risk for each market, in which a trader invests its funds, should not exceed 5% of the total amount of the capital:
Thus, if a deal will be unprofitable, the trader will lose no more than 5% of the total cost. The figure of 5% is taken from Murphy, however, for example, elder gives 1.5% - 2%.
4. Total amount of guarantee fees to be paid when opening positions for a single market group shall not exceed 20% - 25% of total capital:
Markets included in one group, move more or less equally. Large positions opening in each market one group violates the principle of diversification, therefore, placement of funds on similar markets should be treated very carefully. One should never neglect the important rule for optimal allocation of resources in varying degrees, they must be diversified. Their capital should be placed so that the loss of a major transaction not destroyed the trader, and, if possible, were offset by profit from others.
When working on the FOREX market can be divided into four main market, within which the behavior of exchange rates in a rather similar: the dollar area, the sterling area, йеновая area and the Eurozone.
5. Determination of the degree of portfolio diversification:
Diversification is one of the ways of protection of the capital, but in diversity should also be a measure. Always reasonable compromise between diversification and concentration. More or less reliable distribution of funds may be achieved by opening positions on the four-to six markets of different groups. The more the negative correlation that exists between the markets, the higher diversification of the investment.
6. determining the level of stop-loss orders:
Stop orders are usually placed in the period of absence of the trader at the workplace and the main task put save a trader from ruin (execution of stop-loss) or provide additional income (stop order).
the Value of stop-loss, firstly, depends on how much the trader is willing to lose on a single trade and, secondly, from its calculation of the market situation.
Let the trader has a dollar Deposit size S. When opening a position he admits the loss L per cent from the Deposit sum.
Suppose contract for 100,000 was opened purchase of USD against the sale of the Swiss franc CHF, the opening price was p1.
Buy USD 100,000;
Sell CHF p1 x 100,000. At what level p2 trader must put an order to sell, not to exceed a level of permissible loss SHL?
If the order at the level p2 triggered, the loss from the position would have amounted to:
on The other hand the loss should not exceed USD SxL, or in Swiss francs CHF SxLxp2. Therefore, we have:
where we get the following expression for the level of the order:
it Should be noted that when determining the level of stop order trader must be based on a reasonable combination of technical factors indicated on the chart, and for the protection of its own funds. The more volatile the market is, the more levels should be removed stop-loss orders from the current price level. In the interests of the trader to place a stop order as close as possible to the level of prices, to reduce the losses from unsuccessful transactions to a minimum. At the same time too "hard" stop orders can lead to the elimination of unwanted items in short term price fluctuations ("noise"). Too remote stop orders are not sensitive to the "noise", but can lead to significant losses.
7. to determine the proportion of possible gains and losses:
For each potential transaction is determined by the rate of profit. This profit rate must then be balanced against potential losses if the market moves in an undesirable direction. Typically, this ratio is set to 3 to 1. Otherwise, the entry should be abandoned. For example, a trader establishes the risk of the transaction of $100, the potential profit should be $300.
because the relatively small number of transactions during the year can bring significant profit, you need to try to bring this profit to the maximum, keeping the lucrative position as long as possible. On the other hand, it is necessary to minimize loss of failed transactions.
8. Trade with several positions:
Entering the market multiple contracts (i.e. Contracting more than one lot), the trader must divide them into so-called trend and trading positions.
Trend positions underway with quite liberal stop orders, which allow to keep these positions even in conditions of consolidation and price adjustment. These positions give the trader the ability to get the maximum profit.
Trading positions are intended for short-term trading and in a rather rigid stop orders. Because of this, when certain price points they are closed, and restoring trend reversed.
9. Conservative and aggressive approaches to trade:
the Majority of analysts prefer the conservative approach. For example, Tevels, Harlow and stone in his book "Game on commodities futures markets," they write:
"...a trader has the worst possibilities to get profit, but sticking to a conservative style of trading, in fact, more likely to achieve long-term success (victory in the game), the trader has the big opportunities of profit, but playing aggressively."
This is the opinion of the Murphy:
"...the conservative players eventually did win. Aggressively plays a trader wants to get rich quickly. Its profit is really significant - but only as long as the market moves in a favorable direction. When the market situation changes, the aggressive strategy usually leads to a crash."
10. Rules for opening positions:
a) open only if you have one primary and at least one additional signal;
b) when opening a need to define and put on paper:
the price of entry into the market;
the price at which we close a profitable position;
the price at which we close loss-making position;
estimated time of "life" of the open position.
) gently and briefly speak against the trend;
d) caution for a short time to speak during a flat.
11. Rules positions and the partial closure of the estimated time:
a) support the position only if the analysis confirms earlier findings;
b) partial closure:
when you receive damages over settlement;
if the price has reached the clearing mark for profit;
upon receipt of loss is less than estimated;
if the price remains at the same level;
if the price has not reached the design mark to obtain the profit.
12. Rules closing positions:
after the estimated time;
upon receipt of estimated earnings;
upon receipt of settlement of losses;
at achievement of maximum profit.
PRACTICAL RECOMMENDATIONS FOR DEVELOPMENT of its OWN SYSTEM of MONEY MANAGEMENT IN FOREX.
1. it is obligatory to expose stop order and a limit order;
2. when placing a stop and take profits in mind that the ratio of profit/loss must not fall below 2/1;
3. a stop must be not closer than 40-50 pips from the entry point. More close to a stop sentenced because, entering the market, You wouldn't be able to catch the bottom pichok. Error is usually 10-15 pips. 5 pips plus a spread. If we take into account the market noise (10-15 pips), we get that the stop orders placed at a distance of less than 40-50 pips from the entry point, almost no chance to survive the position;
4. on the basis of percentage points 2 and 3, we obtain that the take-profit orders should be not less than 80-100 pips from the entry point. This system of money management will minimize factor broker, i.e. attempts to reduce Your profits at the expense of слипаджа (slide quotes against the client to close a position). The value of слипаджа will be for You a minor factor. You can win any broker;
5. when the value of stop orders 40-50 pips and a take profit of about 100 pips you need to keep positions open for more than two days. If the price does not go in Your direction, it would certainly go against You. Why in this case wait for activation of the stop order;
6. keep under pledge of not more than 10% Deposit;
7. not to make deals that could lead to the loss of greater than 5% of the Deposit;
8. move the stop order and/or take profit only in the direction of reducing the loss of the profit increase. Get involved in it is not necessary, because You risk that a stray TEC licked Your stop (too close пододвинутый to the current price)and the price will make a trip to Your limit is without You.