As you know, each trader should have his own trading strategy to achieve profitable trading. Thus, he needs to have his own principles of analysis and forecasting the movement of the asset future price. And how accurate the forecast will be, is determined by the profitable trading. However, I do not fully agree with that. After all, you can constantly predict the right direction of the asset, earn on this and with just one transaction to cover all the profits or even to lose funds.
In order to avoid this, effective capital management rules should be applied.
Capital management includes rules of risk and money management, which regulate the entire process of trading on the part of cash flow control. Each of these types has its own function and a number of tasks that must be addressed by means of the risk management. To understand this, let’s look at each of them individually.
Risk management is a set of rules for limiting the fix api trading mode in order to minimize losses in the context of each transaction. Risk management allows the manager even before opening of the transaction to know how much he is willing to lose from this investment. This allows you to prepare the trade based on a certain loss percentage.
Thus, the risk can be set to the following trading parameters:
- Transaction risk: limiting the possible loss in each transaction;
- Daily risk: the maximum allowable amount of loss in a single day. In the event of its occurrence, the trading on that day is terminated;
- Maximum number of loss-making trades: if this limit is reached, the trade also ceases;
- Weekly risk: similarly, as for the day, you need to limit the possible losses in the context of a week or even a month;
- Risk reduction when reaching the established limits: I also recommend that in the event of a regular occurrence of risks, you need to limit this parameter (transaction risk) until your trade returns to its previous revenue level.
These risk parameters allow you to monitor possible losses from different sides, which allows you to save your capital.
Certainly, the entire risk control depends on the type of trading strategy and the deposit amount. Some people accept a risk of 0,5%, while others cannot trade in this corridor because of the insufficient deposit amount. Of course, there are strategies, in which the risks themselves are at a minimum level or completely absent. As a rule, this group includes high-frequency algorithms that lead to fix api arbitrage trading- http://forexzzz.com/product/forex-zzz-lock-arbitrage/.
Money management is a control of all open positions. If the risk on the transaction is more in control of a particular transaction, then money management should determine the maximum losses in case of a decline in all transactions, because you can put the risk on the transaction at 0,5% and open 100 transactions, which in future will guarantee -50% of the capital. To avoid this, it is necessary to use money management and combine it with risk management in its fix api trading.
Thus, money management can be determined in the following parameters:
- The maximum volume in one trade operation: the parameter will allow you to determine the volume based on the risk and further reduce it using money management;
- Maximum use of margin funds: the amount of all open positions should not exceed the percentage of the capital you set;
- Full deposit risk control: as I have already mentioned in the example above, money management should signal the trader about the maximum risks in case of triggering all stop loss levels (http://www.investopedia.com/terms/s/stop-lossorder.asp).
These key rules of risk and money management allow you to manage the capital and allocate correctly the investment funds. After all, the main task of the fix api trader is to just keep the capital in the financial market, and only after that to earn money.