Percentage Fixed Management of funds
This is the most popular method of money management. The idea behind fixed percentage money management is that instead of risking a fixed amount, you risk a percentage of your money per trade. The capital difference between a fixed lot and a fixed percentage is shown in the table below.
Alternatively, if your trading strategy has been losing for a long time.
You can use leverage, which means leverage when trading on the online currency market (or the Forex). This means that you can control a large amount of money with the money you’ve put up, while the rest is borrowed. If a forex broker offers a leverage of 100:1, it means that you can control 100 times as much capital, or $ 10,000, with a $100 investment.
You do not notice anything else about borrowing because the broker handles it. If you keep a position open for more than a day, you will be charged interest, known as the rollover rate (when the positions are not closed towards the end of the day).
That can also save you money; see the article “What is the Carry Trade?” for more information.
However, because most forex traders only hold positions for a few hours, they are never exposed to rollover rates.
In Forex, how does leverage work?
Let us say you want to speculate on the Euro’s rise against the dollar by going long on the EUR/USD pair (more about opening a forex trade). The smallest ticket with many forex brokers is a mini ticket, which is worth $ 10,000. If you didn’t have Leverage, you’d have to put $ 10,000 down to buy one mini lot. (You can say you have a 1: 1 leverage.) 1 pip is worth $1 in a mini lot.
Assume your prediction was correct, and the EUR/USD rises 50 pips, giving you a profit of $50. Unfortunately, that is only a 0.5 percent return.
Imagine the same situation, but the forex broker now offers you a 100:1 leverage option. That means that for every dollar you invest, you gain control of $100 in capital. You only need $100 to buy a $10,000 mini lottery ticket. If the EUR/USD rises 50 pips, you will make a profit of $ 50 or a super return of 50%!
Of course, things can go horribly wrong. For instance, if the EUR/USD drops 100 pips on the Forex, you will lose $ 100 (unless you have set a stop/loss of 25 pips, in which case your loss is only $ 25).
However, you would have lost the same $ 100 if you hadn’t used the Leverage, and you could only participate in the online currency market if you put down at least $ 10,000. (And you could only buy one mini lot with it after that)
Is forex leverage only beneficial?
Yes, indeed. After all, an investor is given the opportunity to trade with 100, 200 times the amount of money he has invested. Interest does not have to be a factor because if you hold the position for less than a day, you will not be charged any interest. Besides, if the currency you sell has a lower interest rate than the currency you buy, you will be paid interest if you keep the position open.
You can trade on the forex market on your own.
Simply put, if Leverage 100: 1 is available, you will be able to trade for free with 100 times the amount of money you have invested.
Why is leverage referred to as a “dual-edged sword”?
Because you are increasing your “exposure,” you are risking just as much as you are gaining. If you invest $100 and increase the price of a pip in the EUR/USD to $1 per pip but lose 50 pips, you have a -50 percent negative return.
Many new traders make the mistake of using leverage to risk a disproportionately large portion of their capital in a single trade. That violates several basic investing rules, the most important of which is that you must always ensure that you have enough trading capital to stay in the game. If you are broke and can’t play anymore, you are also robbing yourself of the chance to get back on top.
However, the fact that leverage is available is excellent news for all investors. After all, you can make free use of multiple of your own investment.
What is the proper way to use leverage?
A good rule of thumb is to keep your total exposure in a single trade under 2% to 3%. For many new traders, this is far too conservative, as it requires a deposit of around $ 1000 in order to trade even a small amount.
The $ 10,000 mini lottery ticket was previously the smallest lottery ticket available to forex brokers. 1 pip costs $1 on a mini lottery ticket, as previously stated. If you deposit $ 200 and begin trading mini lots, putting 20 pips per trade (pretty tight), you are risking 10% (!) of your capital per trade. Even though you have a lot of potential for forex trading, you make it extremely problematic for yourself.
However, depositing $ 200 and seeing if you like Forex trading enough to get serious about it is something to be said. And if you are lucky – and many of today’s traders began this way – you can turn that $ 200 into $ 1000 and switch to a more conservative strategy.
However, because many forex brokers now offer smaller lots, known as micro-lots, this is no longer necessary. Micro lots are ten times smaller than mini lots at eToro, so $ 1,000 is a micro lot. One pip is equal to ten cents. So, for $ 2.50, you can purchase a micro lottery ticket (leverage 400: 1).
That means you can start a conservative money management strategy with just a $100 deposit, using 25-pips stops and only risking 2.5 percent of your capital per trade!