Trading the financial markets can result in high returns or money losses. You enter the trade and there is a 50% chance the market will go up, so is 50% it will go down. You have to take risk into account. On Olymp Trade you can close the trade before its expiration, still doing this you are losing some money.
With growing experience, you learn when are the best conditions to enter the trade. To maintain your account balance you will also need to study money management strategies. And here is your guide.
What capital management strategies are pursued by successful traders?
Fixed trade size
Naturally, you would like your account to grow. But sometimes the loss may happen. What some traders will do now is to raise the investment amount so they recover money faster.
It does not always work this way. The transaction may lose again and in such a case your account balance will suffer even more.
What successful traders are doing is simply each time investing the same sum of money. As you can see in the example beneath, fixed trade size will eventually bring you profit when your prediction was right in 6 out of 10 trades.
Trading the initial amount combined with the profit
This capital management strategy says that you should invest a certain amount of your money increased by the profit from the previous trade. If the first trade wins, you put the accumulated income for further trades.
In the example below, you invest $10.00 with a return of 82%. If you win, you will receive $8.20. But in the next trade, you put the total amount of $18.20. And so on and so on. This way, in the next transaction you invest $33.12 because such was a profit. In a series of our three successful trades, we can end up with a final win of $60,29.
This particular strategy is a powerful model to quickly increase your profits because you are using not only the initial amount but also profits from past transactions. You need to treat that method as a strategy for a series of trades. To make it profitable you need to win in all three consecutive trades. If one of the trades in a row fails, your loss will be always $10 (because it was an initial amount for trade 1) and after that loss, you need to start a new series.
When we compare this strategy to the fixed trade size model you can clearly see the benefits. In fixed trade size strategy, when you have three successful trades in a row, you will end up with $24,6. And using previous profits you can grow your account by $50,29.
Martingale money management strategy
There is an ultimate guide to the Martingale strategy where I have analyzed its usefulness in capital management. Check it out.
The Martingale money management strategy is considered to be one of the riskiest ones. It involves an increase in the amount you put into the following trades till you eventually win the trade. In such a case, the cycle is to be started all over again.
You have to be aware of the disadvantages of this method, which are plenty. I would say more than the advantages. For starters, using it can cost you all your money. If you experience multiple losing trades in a row, and each time you increase the investment, you might drain your account. Another drawback is that the winning transactions should balance the lost ones from the previous sessions and add relatively small profit.
Take a look below at how the Martingale strategy works.
This money management can work effectively with any trading signals. It all depends on how many losses in a row your trading balance can cover. If your trading method statistically does not generate a long series of losses you should be okay. But you need to be careful cause sometimes actual trading results may differ from past results and there is no guarantee that you will not end up with an empty wallet.
Taking the above into account, I would recommend using the Martingale strategy only when you are familiar with it and sure of your qualities. Otherwise, I suggest you invest small sums into one trade and rather make a small profit than lose everything.
Intuitive money management
Trading with your gut, meaning with your beliefs, with the feeling that the transaction will go right, involves high risk and big returns. If you can identify the trend, the chances of winning are pretty high. You can invest a bigger amount of money per trade. On the other hand, if you are not so sure where the market is going next, you put just a small amount into a trade.
In an intuitive trading method, emotions can cause some problems. When the small trades bring you money, you can gain too much confidence and want to try with bigger amounts. But when you invest huge money and you lose, you may feel discouraged and fear to invest big money in the future.
Well, let’s put it this way. Intuitive trading is not really a capital management strategy, but for many experienced traders, it can still be useful when using additional factors consistently to decide about a particular trade size.
Why you should have a money management strategy?
A trader should always protect the money. The goal is to make them grow. Sure, you should also be able to predict the losses. But not to lose a great portion of the capital. For this reason, having a good money management strategy is so important.
Every time, you should specify the amount you will trade. Moreover, you should define how many losing transactions you are willing to take before you will be ready to stop for a day. Furthermore, you should include in your strategy when to trade and when not.
Many kinds of money management strategies can be used while trading on the Olymp Trade platform. There are those we described in this article, but nothing stands against you create your own, that will fulfill your needs and goals. Remember, there is always a risk while trading currency pairs or other assets. But if you know the rules, have a solid strategy, and are prepared to learn, then you just might earn enough.
There are no guaranteed profits and probability plays a big role in trading. Nevertheless, with a good capital management strategy, you can rest assured that your money will keep growing.
Wish you high profits in trading!
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