Forex Trading and Diversification
Not just anyone can make profit in the business of forex market trading. Traders often do not realize that they must have good money management to win and not lose. Only 5 in 100 forex traders who begin trading in a system with 60% odds will make a profit by the end of the year, the other 95 will lose money because of their poor money management skills. This is obviously not a very desirable outcome as trades enter the forex system to make a profit, not lose their money! Learning good money management skills is the crucial difference between who wins and who loses in the volatile world of forex trading.
Essentially, money management can be summed up as the amount of money put into a trade and the risks you are willing to accept when making a trade. The two should balance out, as it is useless putting too little money into a trade just as it is dangerous putting too much money into a trade. It is useless and unproductive to only ever enter low risk trades as you will make very few profits. It is also very dangerous to enter a lot of high risk trades though the rewards may be great if they are won! It is important to understand the concept of money management and the decisions made in trading when diversifying your forex trading. A number of strategies can be put in place to help preserve your balance from any high-risk liabilities.
Be sure to know what “core equity” is as it greatly affects your money management. Core equity shows the starting balance in your account then considers the amounts in open positions to illustrate what the actual/minimum near future position of your account is. In simpler terms: if your opening balance is $10,000 and you make a $2,000 trade, then your core equity is $8,000. If you then enter a trade for another $2,000, your core equity drops to $6,000. Basically, it is the amount of money you have available to you to use even if your open positions are lost. Very simple, easy to understand, but essential to successful money management!
Diversify your trades by using several currencies with low correlations. Trading with only one currency generates very few signals. If your account balance is $100,000 and a core equity of $90,000 and choose to enter a second trade, calculate the 1% risk from the core equity. This being $900, the second trade should not exceed this amount!
The Martingale rule is also crucial to understand when attempting to diversify your forex trading strategies! In threory if you are losing then you need to increase your risks! For example: Trade $200, if you lose trade $400, if you lose trade $800, if you lose trade $1,600 etc. Each time you lose double the amount! Be sure also to understand the anti-martingale strategy, which states that this is extremely risky!
The Martingale strategy works by assuming if you lose more than four times the chances to win greatly increase as you add money, which will recover and exceed your losses. Unfortunately, the odds when using this strategy are still 50/50 regardless of your losses, but many choose to adopt this strategy. For example: a trade starts with a $10,000 balance and loses four trades of $1,000 each. This leaves the trader with $6,000 so they assume that there is a high chance of winning the next trade but of course, it is still a 50/50 chance that they will lose again. If they do the same thing again they are brought down to a balance of $2,000, which is near impossible to recover back to $10,000 or more. This is an easy mistake to make when you are new and any experienced trader never risks so highly as to gamble in this manner, unless of course the trader intended to lose all the money in a short period of time.
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