It's about settings, approaches, calculations, analyses that give us the answer to how much capital we can afford to lose in a concrete trading session and what the lowest ratio between profit and loss we need is, as far as money management goes, to keep the trading account's profitability.
For example, if you hold US Dollars, or if you are receiving payments in US Dollars while it’s not your domestic currency, then you are basically long the Dollar and you are exposed to the risk of it falling in value. If you own a house you are exposed to the risk of its price falling. Whether it’s a currency, real estate, a commodity or something else, if you hold it or own it there is a risk that its value may decline.
While most people will not think of ways to protect their assets or investments in such cases, businesses and professional investors are always thinking about this and are looking for ways to do so.
Do you disagree with ESMA about the restrictions on trading leverage in EU? Make your opinion count!
Volatility is something that is always present in markets, but many novice traders are not really aware of or don’t pay enough attention to. Yet, volatility is an absolutely crucial aspect of trading financial markets because when volatility changes the rules of the game usually change with it. Thus, very often new situations are created in the markets where what worked in the past doesn’t work now.
No trader should get into this type of trading until after they’ve had long-term positive results and profit using one instrument. Starting to trade several instruments at once when you can’t even keep your trades profitable with one usually sends you straight to hell.
So how do you start? Firstly, it’s important to wisely choose your next instrument. It might seem like it’s no different from choosing the first one, but that couldn’t be further from the truth.
When you’re choosing your first instrument, you’re not as limited as when you’re choosing another one. When you’re choosing a second instrument, you have to take into account that it should not correlate with the first one too much.
In cases when both instruments correlate with each other in some way, trades on both markets tend be either winning or losing. The final effect can be similar to opening a twice as big position on only one market. That means that by trading instruments that correlate with each other too much, you are simple increasing the potential profit or losses.
Usually, forex traders who trade the currency pair EUR/USD prefer their second currency pair to be neither EUR or USD, because a currency pair that would include one of those currencies would most like partially correlate with EUR/USD.
Money management when you’re trading more instruments
Just like when you’re trading one instrument, trading more instruments at once requires you to take a few steps to set up your money management correctly.
1) Trading strategy analysis: First of all, you need to analyze your trading strategy; in this case, it’s more likely to be several strategies that you’ll be analyzing. That is because many strategies work for one instrument but not always for the other. And to be able to come up with quality money management, both strategies should share some similar characteristics, for example a similar SL and TP ratio.
2) Setting maximum loss: Most often, maximum loss is set in percentage in proportion to the size of the trading account. When trading one currency pair, it is usually 1-3% of the trading account per open position, depending on the trader.
But when you have several positions open at once, you need to divide the percentage loss by the number of positions that can be traded at once. If you didn’t do so and traded, let’s say, six currency pairs at once, you could easily lose 6*3%=18% of your trading account in a second, and it’s hard to come back from that both financially and mentally.
3) Optimizing traded volume: When you’ve chosen your instruments, and assigned trading strategies to them, you can take one final step and optimize traded volume. What does that mean?
When one currency pair on a profitable position shows 60USD and another only 15USD, some traders increase the traded volume four times. Optimization is usually used in short time periods to prevent the account from being in loss with the same amount of profitable and losing trades.
Volume optimization explained
When your first instrument shows a profit of 60 USD for a profitable trade and a loss of 30USD for a losing trade and the second instrument shows a profit of 15USD and a loss of 7,5USD and your first instrument has a streak of losing trades and the second scores a similar amount of profitable trades, your account will still be in loss, because each losing trade is 30USD on average and each profitable one only 15USD.
When you optimize the volume traded, both instrument will have a winning trade of 60USD and a losing one of 30 USD.
Trading several instruments at once brings forex traders many advantages, but can have disadvantages as well, so everyone should consider well if they want to practice this type of trading or not.
You can trade more instruments with the right money management with Purple Trading, a forex broker fully regulated within the European Union.
You can find out more about Purple Trading or set up a free demo account without risk on our website: https://www.purple-trading.com
Get in touch with us any time through our contact options, our friendly support team will gladly help you and answer your questions.
About the Author
For more information on the risks of trading, click here.
P.M. Purple Trading is a trade name owned and operated by L.F. Investment Limited., 11, Louki Akrita, CY-4044 Limassol, Cyprus, a licensed Cyprus Investment Firm regulated by the CySEC lic. no. 271/15.
Operating on the foreign exchange market long term is the dream of many beginning and experienced traders. When traders get through the rough patch of starting out in Forex, they get more knowledge, experience, and abilities to get closer to their goal.
In practice, letting a winner run can many times translate a winner turning into a loser and cutting losers early can, in the end, turn out to be cutting a winner prematurely.
And certainly, those are situations we most utterly wish to avoid.
The fact of the matter is that every trader is likely to lose a lot of money unless he understands the basics of effective money and risk management. The article shall discuss eight of the most important points to always remember regarding the forex risk management.
Here are a few important steps that every trader can take to minimize potential losses and preserve their investment capital.
Forex Education - Basics:
Forex Education - FX Brokers:
Forex Education - Technical Analysis: