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Article Series:
Learn Forex Trading / Currency Trading Tips
Diversify
Your Forex Trading Strategies
Learning
how to manage your money is the critical difference between
who will win and who will lose in the business
of forex market trading. If 100 forex traders begin trading
by using a system with 60% of winning odds, only about 5 of
those traders would see a profit by the end of the year. Despite
those 60% winning odds, only 95% of those forex traders will
lose because of poor money management skills. Many traders
don’t realize that anyone entering any trading system must
have great money management skills in order to succeed. After
all, traders enter the forex system to make a profit, not to
lose money.
Money
management will stand for the amount of money you will
put on a trade and the risks you are willing to accept for
that trade. In order to diversify your forex trading strategies,
it’s very important to understand the concept of managing money
and also to understand the difference between managing money
and trading decisions. There are a number of different strategies
to use that will aspire to preserve your balance from any high
risk liabilities.
First off, you will need to understand the term “core
equity.” Basically the core equity illustrates the starting balance
of the account and what amounts are in the open positions.
It’s very important to understand the meaning of core equity
because your money management will greatly depend on this equity.
For instance, if you have an open account with a balance of
$5,000 and you enter a trade with $1,000 that makes your core
equity $4,000. If you enter another trade for another $1,000
then your core equity would be $3,000.
It would be better to begin
diversifying your trades by using
several different currencies, because by only trading one currency
pair, you will generate very few entry signals. For example,
if you have an account balance of $100,000 and have an open
position for $10,000 then that makes your core equity $90,000.
If you choose to enter on a second position, then calculate
the 1% of risk from your core equity, but not your starting
account balance. This would mean that the second trade would
not exceed $900. Then if you decide to enter a third position,
with core equity of $80,000 then the risk from that trade should
not surpass $800. The key is to diversify the lots between
all currencies that have a low correlation.
For instance, if you wanted to trade EUR/USD and GBP/USD with
a $10,000 (1% risk) standard position size in money management,
then it would be safe to trade $5,000 in each EUR/USD and GBP/USD.
This way, you will only be risking 0.5% on each position.
It’s very important to understand
the strategies of the Martingale and the Anti-Martingale, when trying to diversify your forex
trading strategies. The Martingale rule means: increasing your
risks when you’re losing. This strategy has been adopted by
gamblers worldwide who claim that you should increase the sizes
of your trades even when you are losing. Basically, gamblers
use this rule in the following way: Bet $20, if you lose bet
$40, if you loose bet $80, if you lose bet $160, if you lose
bet $320, etc.
Ultimately, the strategy
is to assume that if you lose more
than four times, then the chances to win become bigger and
as you add more money, you will be able to recover from your
loss. Although there are many people who choose to use this
strategy, the truth is, the odds are still the same 50/50 even
regardless of the previous losses. Even if you lose five times
in a row, the odds for your sixth bet, and even those there
after, are still 50/50. This is an easy mistake made by those
who are new to the trading business. For instance, if a trader
started with a $10,000 balance and lost four trades of $1,000
a piece for a total of $4,000 then the traders remaining balance
would be $6,000. If the trader thinks there is a higher chance
of winning the fifth trade and increases the size of the position
four times, enough to recover from the loss, then if the fifth
trade loses the trader will be down to $2,000. A loss like
this can never be recovered back to the $10,000 starting balance.
Any experienced trader would never use such a risky gambling
tactic, unless the traders’ goal was to lose all the money
in a short period of time.
# # # # # SolveYourProblem.com : 2007
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