No decision can be regarded as an insightful and wise one in terms of Forex trading until it considers a proper money management strategy. It requires a trader to recognize the flowing course of the money. It is about understanding the inner route and the nature of the money flow to facilitate one’s own interests.
Money Management Strategy for the Beginners
Though the Forex market is ever fluctuating, the natures of those changes are limited. So, experts have formulated some effective money strategies that are meant to help a trader in every situation. None of these strategies is easy to implement in the real-time market. The first step to establishing a master over them is to learn about them.
The Flat-Risk Strategy
This is one of the most fundamental kinds of money-management strategy. As the name indicates, a flat or constant risk method is a strategy where a trader specifies a portion of money for every trade in the pursuit of a targeted profit.
The constant risk parameters can differ depending on the capitalization of the account, the maximum risk tolerance of a trader, and his chosen market (in our case, it is the Forex market). A typically used loss value in such investment is an accumulated amount of around 1 to 3 percent per trade. Think like the professional UK stock trader. Soon you will be able to reduce the risk and take advantage of the premium tools at Saxo. Be strategic with your trading approach.
The inner mechanics of the flat-risk method is quite straightforward. For an account with a balance of $25,000 and a loss-tolerance level of 3%, the maximum risked amount is $750. The outcome of one trade will lose relevancy for the next one’s risk value. It will remain flat 3% of the starting account balance.
Perks of the Flat Risk Method
- It averts massive and lethal loss
- Appreciates market’s longevity the most
- Decreases short-term account value variance
Cons of the Flat Risk Method
- Potential limit is more of limiting
- Account recovery takes longer duration
It is more of a mathematical equation that spawns from the statistical work conducted in the 1950s. It covers the purview of investing and exchanging criteria and attempts to set the favorable capital amount as dispensable on a particular deal. It also depends on the possibility of an investor’s success.
The Kelly Criteria advocates the concept of soaring capital loss, which can be justified by a higher success probability. For example, if a business show about 90% success probability, the appreciated capital volume will be greater than a business with a smaller, say 10%, success rate.
The mechanics of the Kelly Criterion method is a challenging one. Hence, most trading platforms, financial-software-providers offer an automated system to calculate using this formula. However, a simplified version is broadly used by investors and analysts.
Kelly% = W – [(1-W)/R], where W represents the winning rate and R represents an average profit amount
Perks of Kelly Criterion
- Massive potential of profit
- Limited exposure to accounts
Cons of Kelly Criterion
- Consecutive losses can draw disasters
This is one of the most ancient speculation systems in the world. Basically, the martingale method advocates that a person takes a prespecified gain amount on a win and can double the loss amount. If a situation projects a 50/50 chance to the people, they can “doubles down” just after a loss. A profit will be ensured by the higher bets covering the small losses.
Perks of Martingale Method
- Range and time-bound markets offer a higher probability
- Escalates the probability of maintaining short-run profitability
Cons of Martingale Method
- Upward moving market can head to financial disaster
- Leverage can be multiplied quickly
The personality and trading approach of the trader will come in the scenario when choosing any among those strategies. The Flat risk method is considered as a conservative approach to the market where other two are regarded as comparatively more aggressive.