Money Management is a special concept, to which it was decided to devote a whole lesson. Being one of the integral parts of effective trading, Money Management has always been aimed at minimizing the risk of significant losses.
In fact, Money Management gives an answer to the most frequent question that arises for every trader before opening a trading position, how much money should be put at risk? Agree, this is true - before opening a deal, no matter what instrument, we ask ourselves how much it is worth entering the market, thereby determining the amount of collateral.
Guided by Money Management, we will always know the amount of free resources available to open additional positions, and therefore, conducting a particular transaction, we actually predetermine an unfavorable scenario and leave room for trading maneuvers. Most traders, focusing on profits, almost completely forget about potential losses, which, nevertheless, can cause serious losses for the entire deposit.
Tip: never forget that transactions are independent of each other, and despite the fact that the results of a number of them seem quite predictable, in fact there is not the slightest possibility to accurately predict the outcome.
The most effective and efficient systems give accurate signals only in 60-70% of cases. The rest of the time, unfortunately, they are ineffective.
When conducting 10 transactions, be prepared for the fact that 3 of them will not meet your profit expectations. And if you do not allow the possibility of such an outcome, your deposit is doomed to monthly withering.
Naturally, it is impossible to know in advance which of the transactions will bring profit and which will be unprofitable, you just have to allow such a possibility, which once again draws our attention to the need to use Money Management.
Example: You are a client of AMarkets, with $5,000 on your trading account. The leverage is 1:100. After analyzing the market situation, you have come to the conclusion that the European currency is now very attractive for purchases. For this reason, you buy European currency, for example, against the US dollar. The transaction volume is 1 lot.
As a result: 1 lot for the EUR/USD pair will cost you $ 1300 as collateral (volume / leverage * market rate). The exchange rate at the time of purchase is 1.3000. Immediately after the purchase, the European currency strengthens, and the quote of the EUR/USD pair reaches the level of 1.3045 points. Your trading decision turned out to be correct, and confident in your own success, you decide to increase the volume of your open position to, say, 3 lots. In this case, the deposit will no longer be equal to $ 1300, but 3 times more — $ 3900. But this time the upward trend is not so rapid, and after a while it completely changes direction, lowering the pair to the level of 1.2937.
Now to the deposit: For the first transaction, taking into account the opening price at the level of 1,3000 points, we have — $ 630. Things are even worse for the 2nd and 3rd deals. Since we opened them at a higher price — 1.3045, it turns out that the total minus is $ 2160. As you can see, taking into account the open positions, we have no free funds left, and therefore no room for maneuver. We cannot open counter or just additional positions in the hope of correcting the situation. We simply don't have the resources. In addition, by using about 70% of the deposit and indicating the high cost of the item, we will no longer be able to withstand further drawdown, since if the pair drops by several dozen more points, the positions will be forcibly closed due to lack of collateral.
Remember once and for all: not observing or ignoring this concept at all, you will immediately find yourself on the road of endless losses, which, ultimately, will completely reset your deposit.
Using Money Management, you also increase the efficiency of using the part of the balance that is already the result of correct trading decisions. When the profit is fixed on your account, your purchasing power increases, which means that you have more opportunities to conclude the next transactions.
And again, Money Management acts as a deterrent, preventing you from overloading your account balance. Conclusion: if you are not the first person who managed to find a 100% effective trading system, then Money Management is not just desirable, it is mandatory. It doesn't matter what kind of deposit you have — Money Management is mandatory.