When trading on Forex, it is necessary to know how to properly manage your capital; how to calculate the amount of funds needed to make a trade in order to obtain sufficient earnings; and if it comes to loss, how not to lose your entire deposit.
To achieve these goals, there are special equity management methods (money management techniques):
- No money management. Most traders neither calculate the amount of funds that are being used when opening a position, nor estimate potential earnings or losses. It is considered to be a technique too, but if the starting capital is small, several unsuccessful trades will make it completely disappear.
- Multiple contracts. Opening several positions on the foreign exchange market on different instruments, for instance, the EUR/USD and EUR/GBP, a trader can earn profit if the price moves in the right direction. Earnings can be considerable, losses too though.
- Fixed amount for risk. Depending on the amount of funds available, a trader decides how much to put at risk when opening a position. The trader then makes deals not exceeding this amount.
- Fixed percent of equity. This technique is similar to the previous one but there is a small difference: the trader determines what percent of the account value to risk, but not the equity amount.
- Adjust trading on win or loss. It is necessary to track statistics on all operations (the number of losses, profits and the relationship between them). Having determined the relationship (either wins or losses follow one by one, or wins are followed by a certain number of losses), you should increase the volume of your position after successive losses waiting for a further win, or decrease it anticipating a loss.
- Equity curve trading. Most people are acquainted with moving averages, which signal the right moment of entering and leaving the market. According to this method, moving averages (long- and short-term) are used to forecast trade results. If the short-term moving average of the equity curve is above the long one, a position can be opened and is likely to be profitable. If the short-term moving average is below the long one, it is better to wait for a while.