Why Forex Money Management Is So Essential?

People who trade in forex market are usually directed to receive high profits. However, is it as easy as most of the novice traders think? Of course it is not.
As you know, in every business there have always been some sorts of managing your own actions and decisions that refer to the protection from the big losses. It is called the forex money management, and it contains saving, investing, budgeting, spending and controlling the accounts with the purpose of increasing gains and decreasing losses. So to do the right forex money management it is obvious to know some forex money management rules.
For every trader, this certain set of forex money management rules differ one from the other. It is based on the personality of a trader, his or her position and strategy in trading. Forex money management implies the process of managing the accounts in a rational and not emotional way. Traders who are only the beginners in this kind of business may choose the wrong way of managing money. They may think that the actions that the trader does, refer to the gambling. In fact, the gains from such type of trading would be less profitable than from the sober and sensible forex money management. That is why it is very important to realize that the traders do really need forex management rules. These rules will definitely help to deal with the accounts and find out all the necessary information for the right and profitable forex trading.
So what is the first thing the trader should know about forex money management and forex management rules?
It is the risk that has a place all over the trading process as there would be no profits without some risk. Forex money management rules are based on the position to decrease the risk and help the traders to find out what big the risk could be and is it smart to risk more than you should risk in a certain situation. These rules can help the traders to identify how much exactly shares, stocks or currencies he or she could buy or sell in a particular trade. The maximal risk that might occur during the number of situations in these forex money management rules is on the basis of the percentage of the risk. The trader decides how many trades he could open at a certain period of trading.
Also as much important as risk the reward is. It is directed to show the traders the ratio of reward. There is a particular number of rewards and it is also very important not to ignore the rules of this ratio and stick to the right forex money management strategy. It makes your profits to rise in big values. There are also many other forex management tips that are called for better trading and increasing profits. They are directed to the strategies which would help to scale up the results of trading in a profitable way.
All of these forex money management rules may be defined in some sort of a list in a program that is similar to an Excel or Open Office Calc. And all the values which are used in forex money management will be calculated automatically and will help the traders to control the accounts and trades with the less risky decisions. It would be the most important for the traders in the Forex market.
All things considered, you can see that the forex money management shows to be the most important method in the strategies of forex trading. These forex management advices help to operate with funds and accounts of traders in a strict and controlled way that is directed to fewer losses and make high profits. Furthermore, the investment management services appear to control and manage the accounts and finances.

Forex Market Overview

Introduction

The following facts and figures relate to the foreign exchange market. Much of the information is drawn from the 2010 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2010. 53 central banks and monetary authorities participated in the survey, collecting information from 1,309 market participants.

Excerpt from the BIS:

"The 2010 triennial survey shows another significant increase in global foreign exchange market activity since the last survey in 2007, following the unprecedented rise in activity between 2004 and 2007. Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007. This increase brought average daily turnover to $4.0 trillion (from $3.3 trillion) at current exchange rates...The higher global foreign exchange market turnover in 2010 is largely due to the increased trading activity of “other financial institutions” – a category that includes nonreporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others. Turnover by this category grew by 42%, increasing to $1.9 trillion in April 2010 from $1.3 trillion in April 2007." - BIS

Structure

• Decentralised 'interbank' market
• Main participants: Central Banks, commercial and investment banks, hedge funds, corporations & private speculators
• The free-floating currency system arose from the collapse of the Bretton Woods agreement in 1971
• Online trading began in the mid to late 1990's

Source: BIS Triennial Survey 2010

Trading Hours

• 24 hour market
• Sunday 5pm EST through Friday 4pm EST.
• Trading begins in the Asia-Pacific region followed by the Middle East, Europe, and America

Size

• One of the largest financial markets in the world
• $4.0 trillion average daily turnover, equivalent to:
   
• More than 12 times the average daily turnover of global equity markets¹
• More than 50 times the average daily turnover of the NYSE²
• More than $500 a day for every man, woman, and child on earth³
• An annual turnover more than 10 times world GDP⁴
  
• The spot market accounts for over one-third of daily turnover

1. About $320 billion - World Federation of Exchanges aggregate 2009
2. About $70 billion - World Federation of Exchanges 2009
3. Based on world population of 6.9 billion - US Census Bureau
4. About $58 trillion - World Bank 2009.

Source: BIS Triennial Survey 2010

Major Markets

• The US & UK markets account for over 50% of daily turnover
• Major markets: London, New York, Tokyo
• Trading activity is heaviest when major markets overlap⁵
• Nearly two-thirds of NY activity occurs in the morning hours while European markets are open⁶

5. The Foreign Exchange Market in the United States - NY Federal Reserve
6. The Foreign Exchange Market in the United States - NY Federal Reserve

Average Daily Turnover by Geographic Location

Source: BIS Triennial Survey 2010
Concentration in the Banking Industry

• 9 banks account for 75% of turnover in the U.K.
• 7 banks account for 75% of turnover in the U.S.
• 2 banks account for 75% of turnover in Switzerland
• 8 banks account for 75% of turnover in Japan

Source: BIS Triennial Survey 2010

Technical Analysis

Commonly used technical indicators:

• Moving averages
• RSI
• Fibonacci retracements
• Stochastics
• MACD
• Momentum
• Bollinger bands
• Pivot point
• Elliott Wave

Currencies

• The US dollar is involved in over 80% of all foreign exchange transactions, equivalent to over US$3.3 trillion per day

Currency Codes

• USD = US Dollar
• EUR = Euro
• JPY = Japanese Yen
• GBP = British Pound
• CHF = Swiss Franc
• CAD = Canadian Dollar (Sometimes referred to as the "Loonie")
• AUD = Australian Dollar
• NZD = New Zealand Dollar

Average Daily Turnover by Currency

N.B. Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%.

Source: BIS Triennial Survey 2010

Currency Pairs

• Majors: EUR/USD (Euro-Dollar), USD/JPY, GBP/USD - (commonly referred to as the "Cable"), USD/CHF
• Commodity currencies: USD/CAD, AUD/USD, NZD/USD - (commonly referred to as the "Kiwi")
• Major crosses: EUR/JPY, EUR/GBP, EUR/CHF

Average Daily Turnover by Currency Pair

Forex currencies

Most Forex exchanges invariably involve the U.S. dollar against a different currency, as the American economy remains the biggest. Other currencies serve as the base for trade as well, such as the Japanese Yen, the British Sterling, the Swiss Franc, and the German mark. Each country's market has its own particular properties.
Euro came up to take the place of the German mark. The latter was the foundation. The European central bank has replaced the Bundesbank that has lost its past significance after the former East Germany came to reconsolidation.
The feature of the Japanese yen is its instability in some previous years. The greatest rise of this currency has happened in October 1998 when the dollar has suffered 15% reduction against the Japanese yen within a number of days.
The Swiss franc is sometimes called "a safe haven" fulfilling the same function as the dollar does. It is called like this because of the neutrality and independent policy pursued by Switzerland, its economy isolation and banking system privacy.
The British pound has always had significance for the international exchange markets but it mostly has not been stronger than other currencies. This trend has changed vice-versa lately and the British pound has become one of the most important and attractive currencies in Europe. It was the first currency that the forex market dealt with through cables crossing the Atlantic, which is why the term "cable" has appeared.
European currencies had a number of crises because of the attempts to adjust their rates towards one another artificially. French franc and German mark used to create the basis for the Continental European currencies and formed the European currency stem. The stability was useful for the Benelux countries.
Considerable fluctuations around this stem were seen in the currencies of rest of the Europe, Mediterranean and Scandinavian countries in particular. Great alterations have come to foreign exchange trading after the European common currency has appeared in 2001. A number of European banks were forced to make their trading assets reconsideration after the currencies of the countries taking part in the unification were fixed relative one another at the beginning of 1998. Still the Euro appearance is not thought to be harmful for the foreign exchange markets health. The Euro being weak has turned into mark and made non-participating European currencies less stable and more affective to speculative forces. It gives prospects for sterling along with the Swiss franc to turn into the most important European currency market.
Exotic currencies have a severe risk together with an ability to gain very high possible profits. The weak but fixed currencies can be sought much in order to carry out speculative attacks on them that may lead the countries involved to wide depreciation and economical difficulties. A number of developing currencies try to peg their currencies to the US dollar exchange rates to bring the monetary officials to order and force currency holders not to resort to devaluations. In most of the cases, it is impossible to fix the exchange rates due to indiscipline and it mostly leads to considerable depreciation. These devaluations often cause high possible profit but within the stable periods, investors mostly hold the currencies due to high interest rates.
Forex market should not have solid technical aspects grasp while dealing with foreign exchange market especially at emerging markets due to their riskiness. Inability to gain a protection against the risks of these markets can be very harmful at the outlook of the commercial companies. South East Asian and South American markets seem to be the most interesting but it does not exclude African Continent and Eastern Europe possibility to become important markets in future. forex carries out its trading through lots that are the equivalent of the dollar. The "margin" means that while the value of one lot is $1,000 you can accordingly have a control of $100,000 within the currency.
Currency trading in the forex market is usually carried out in pairs. The notation of each pair shows the rates at which its currencies are being traded. The ABC/XYZ format is always used to show the notation. Here, ABC/XYZ does not correspond to any currency pair but it does show the possible notation. ABC symbolizes the currency of one country whether XYZ shows the currency of another one.
It is impossible for the currency to be traded by itself. For instance to make sense of the trade with JPY it must be compared to any other currency but never traded by itself. This process forms the core of the forex market.
Here are some of the creal and common symbols used in the Forex market:

• USD - The US Dollar
• EUR - The currency of the European Union "EURO"
• GBP - The British Pound
• JPN - The Japanese Yen
• CHF - The Swiss Franc
• AUD - The Australian Dollar
• CAD - The Canadian Dollar
• NZD - The New Zealand Dollar

The most commonly traded currencies are referred to as the 'Majors':

• US Dollar (USD)
• Japanese Yen (JPY)
• Euro (EUR)
• British Pound (GBP)
• Canadian Dollar (CAD)
• Australian Dollar (AUD)
• Swiss Franc (CHF)

Most commonly traded currency pairs are:

• EUR/USD which stands for Euro / US Dollar
• USD/JPY which stand for US Dollar / Japanese Yen
• GBP/USD which stands for British Pound / US Dollar
• USD/CAD which stands for US Dollar / Canadian Dollar
• AUD/USD which stands for Australian Dollar/US Dollar
• USD/CHF which stands for US Dollar / Swiss Franc
• EUR/JPY which stands for Euro / Japanese Yen

Numerator and Denominator

The higher fraction is supposed to be the Numerator while the Denominator corresponds to its lower part. For example, in the EUR/USD pair EUR would act as a Numerator being the first or the top, whether USD being after or below is known as Denominator.
The basic currency is usually the Numerator whether Denominator is a counter currency.
Thus, when you would like to buy a currency and you will place the corresponding "BUY" order dealing with the EUR/USD on the forex platform you are considered to be selling the USD and buying EUR. "LONG" is the name for buying process. On the contrary, if you would like to sell the pair you mean that you are buying the USD and selling the EUR. This is called "SHORT" along with the same stock market process when you first sell any stock, currency or commodity trying to buy it later at a lower price, which means you use short selling.
In case you would like to sell or buy a currency pair you are going to sell or buy its Numerator (base currency or the top one), so that the base currency should be dealt vice-versa when you are selling a currency pair.
While trading, the base currently is always bought and the counter one is sold. To sell any pair, you simply specify the currency for sale and the one to buy. Finally, the transaction is equal. The absence of any restriction, while short selling, is an advantage of the forex market. Another plus is that both market rise and fall bring profit. You can earn in forex at any trends directions whether the stock market should rise in order to give profit.

Forex market

Forex exchange market is the largest market that sells and exchanges the currency. The concept for the Forex and Forex trading is changed and kept on changing for its improvements. It is the work of the bank, but now it is given to the private owners. The bank has given it to them because technology is very advanced and they pay them the necessary infrastructure. The banks sell and purchase the forex trader at higher prices and sell them at lower prices because you cannot sell vice versa in this market.
Spread is only pay to the market and that is the main earning. This currency forex exchange is categories in two currencies. First is base currency and other is quote currency. The spread is the difference of the bid and ask price of given currency. The brokers apply the altered quotes on the transaction fees and earn lot of money. forex do not know any rules and regulation because SEC cannot apply any type of regulation on it. SEC is regulates the orderly market, so it is the non-regulated market. The innermost privates are the commercial banks that are now in the top most banks. Pips are the large digit of quotes. The currency trade with spread available is usually within 1 to 5 pips. EUR or USD bid and ask quote may vary among 1.3000 to 1.3001. It is having the spread of 0.01%.
Most of the currency quotes are purely driven by the supply and demand. Usually the USD hit divert from its direction for a second or minute. When the spread widens or worse you will not let you in at all. This is market, where the market maker has the compulsion to the honor trading to supply the quotes. He will let your order hand until the price slows down. The brokers also make threat, when the market price slower downs. They will shift the quotes in the direction of the trend, make their markup, and delay the execution. After waiting for some time it will gives lower price that occurred meantime. Some of the broker just shut down their server and do not distribute the information and say that there is some technical problem there. Broker does not want to give the news to the customers. The broker does these types of manipulation and therefore is a big market player. The customer should be bewaring of those brokers. They can trap your money from the lines of resistance and create the technical signals for breakouts. The bank must get some other sort of advantages but the customer might get the inevitable loss.
If you are dealing with interest then the accounts are reduced or increased with the interest rates. For the slower trend, the betting option is good for a price change. The weak currency comes with the high interest rates. There must be a comparison between forex and stock market but there are many more good options in the stock market better than forex. You can be exploited in some medium sized trends and technical analysis. In short, forex is just having no motors. Everything is having its pros and cons so forex is also having the demerits. You are left with the risky entry and you will get your money, after very long settlement. It is the easy cash cow for the banks so the forex is running just for their benefit. The new traders should keep in mind that you should focus more on currency pair.
Market size and liquidity
The foreign exchange market is unique because of the following features:

• trading volume
• the extreme liquidity
• the large number of, and variety of, traders
• geographical dispersion
• long trading hours - 24 hours a day (except on weekends)
• the variety of factors that affect exchange rates

Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study Triennial Central Bank Survey 2004:

• $600 billion spot
• $1,300 billion in derivatives, ie
• $200 billion in outright forwards
• $1,000 billion in Forex swaps
• $100 billion in FX options

On the spot market, according to the BIS study, the most heavily traded products were:

• EUR/USD - 28 %
• USD/JPY - 17 %
• GBP/USD (also called cable) - 14 %

in addition, the US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%).

What is FOREX (Foreign Exchange)?

The simple sense of Forex (Forex currency exchange, Foreign Exchange) is simultaneous purchase and sale of the currency or the exchange of one country's currency for the one of another country. The world currencies do not have a fixed exchange rate and are always fluctuating, since each are traded in the currency pairs like Euro/Dollar, Dollar/Yen and others. 85% of daily trades are taken by major currencies trading.
Investments usually deal with 4 major pairs: Euro against US dollar, US dollar against Japanese yen, British pound against US dollar, and US dollar against Swiss franc or EUR/USD, USD/JPY, GBP/USD, and USD/CHF used to sign these pairs accordingly. These major pairs are considered as the Forex market's "blue chips.� You will not receive any dividends on the currencies. Well known "buy low - sell high" gives the profit for currency trades.
In case you have a forecast that one currency would get higher to another, you can exchange the second one for the first one and wait for the profit. If you are lucky to see the trades following your forecast you can make an opposite transaction and to exchange currencies back gaining the profit.
Forex brokerage companies, also known as major banks dealers, carry out Forex transactions. Forex market is worldwide and your European colleagues may make a transaction with Japanese traders when it is time for you to sleep in the North America. There are 3 shifts for the major institutions to work in due to 24-hours a day activity of the Forex market. It's possible to ask for overnight execution for take-profit and stop-loss orders of the client.
Prices in the Forex market fluctuate without any dramatic changes unlike stock market where considerable gaps are likely to be seen. There isn't any problems entering and exit the market due to its daily turnover of about $1.2 trillion. Forex market can never be forced to stop. The transactions were carried out even in 2001, on September 11th.
Foreign exchange market (also called Forex of FX to shorten the name) is the oldest market in the world. It is also seen to be the largest one. Since currencies' primary market work 24-hours a day, Forex is also the largest market with highest liquidity. This is an interbank market carrying out spot (or cash) transactions. The currency futures market, to be compared with Forex is traded only 1% as much.
Forex market does not have any exchange center unlike the stock market. Forex trading seem to go after the sun around the world, from banks of the United States to other parts of the world like Australia, New Zealand, the Far East or Europe and back to the US some time later.
High minimum amount of transaction and strict financial requirements used to make this interbank market unavailable for small speculators. The only dealers of currency markets were banks, huge-amount speculators, and largest currency dealers. They had an ultimate access to this market dealing with lots of primary exchange rates of the world currencies, the market with an extremely high liquidity along with an unusually strong nature of trends.
Nowadays small traders have an opportunity to purchase the small lots (units), because of the large inter-bank units being split by market maker brokers like FX Solutions, at the amount they like.
The traders of any size like small companies and individual speculators have an access to the market at the same price fluctuations and exchange rates, which only large players used to enjoy recently. Market makers monitor the rates so that produce their profit on the difference of rates at which the currency was bought and sold.
Foreign Exchange Market has an acronymic name Forex. It has the largest size and the liquidity throughout the world nowadays. Forex daily transactions are carried out at the common amount from 1 to 3 trillion dollars. No stock market is able to deal with a comparable amount of money.
This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time, it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.
This is certainly hypothetically because many newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.
The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit, and less than 1% of traders make large fortune at Forex. You should not produce, sell, or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.
This market is a platform for banks, transnational corporations, and individual traders to change the currencies they possess into other ones. This is the spot Forex market. In this market, you can trade with up to 1:400 leverage. This means you will receive $400 (to your account) for each dollar invested. Therefore, you can trade with the $400,000 sum having invested $1,000 onto your account.
Still, there are lots of experienced traders who consider such leverage to be dangerous and will not proceed forward. Nevertheless, if you know how to use such high leverage, it will only do you good. However, this is the place to stop speaking about the basic things. Keep reading these articles if you want to be aware of how this market has occurred and some of its historical matters.
Now it is time to speak about the strategies and the way of making money at Forex some traders use. First, we should say that the things that work in one case do not certainly work in another. The fact is that currency trading surely means risk. Still, there are a number of strategies for the newbie to use to be the winner.
Forex trading may seem very easy but it is not. Your high today earnings may turn into considerable losses even of your starting capital tomorrow. Newbie traders are likely to make the same mistakes several times. Here is a list of such typical mistakes.

1. There is no use of searching the "Holy Grail"

This phrase is to think for those who are scared of losses or being too greedy does his best to get rich in no time. You can surely make lots of money some of the time and there isn't a necessity of producing and advertising anything but a huge homework is required to learn first. You have to know how this market works and which factors can take the exchange rate up or down. You should also be aware of the effective management for your money not to lose everything.
The majority of traders starting at Forex, look for their ultimate strategy that will cause no losses and will bring only profit. The desire of such people is to make a strategy that guarantees stable profit and millions of earnings in a short time without any losses for them to quit and enjoy their fortune and the new huge house. This will never bring any success.
No strategy will give you only profit and such research is only waste of time. High profits of trading are caused by high risk, and you will not earn a fortune without being on the knife-edge. Do not be sure that every trade will close in advantage to you. You will always feel uncertain and there is no way to vanish it. It means that you should always be ready to the possibility of your strategy failing even if it is thought as perfect.
You will save a plenty of time and nerves by avoiding the search for the perfect strategy of earning millions. Even if you find this strategy, you will not ever need it. You will see why later.

2. Apply fundamental and technical analysis.

At the beginning of my trading, I relied only on the money management on which I wanted to base my strategy and saw no sense of these analyses. However, money management, which is still very important, does not worth omitting them. You can forecast the direction of the market basing on your technical and fundamental strategies to see their effectiveness.
You'll be able to make forecasts of price movements by applying the past data of the prices and graphs to the technical analysis methods. You can predict future prices with the level of accuracy dependent on your technical analysis skills using the graphs of the rates you observe.
Trading with some brokers you can see technical indicators along with the graphs. You can apply it to your demo account and estimate your prediction skills necessary for planning trading decisions.
It is impossible to choose the most effective indicator among lots of various ones. Each trader has to decide for himself which indicator is best for him. You cannot find any magic formula; you just see the graphs, make your forecasts and find out whether they come true seeing the values in the news later.
Your decisions form this formula along with your knowledge that occurs out of the practical experience. Starting trading with an online broker it is best for you to trade with yourself on the sheet of paper rather than invest real money at once.
There are many technical analysis indicators available but here are the ones that are the most widespread: the Moving Average Convergence Divergence (MACD), the Bollinger Bands, Pivot Points, RSI, Stochastic, Fibonacci, EMA, and Elliot Waves.
The broker's software will automatically make all the necessary calculations when you add the technical analysis indicator to the graph so that you will see some facts, which are unavailable without using these indicators. It is even possible for you to build your own technical systems basing on these indicators. Fundamental analysis is another tool that maximizes your profit and minimizes your losses on the trades. Some traders prefer only one kind, but the majority prefers both.
Fundamental analysis means trading following the news (e.g. telling about the economies or unemployment rate) in the countries of the currencies you trade. They can also tell about the events that can have a strong influence on the currencies' exchange rate.
You can make forecasts on the market direction by following the news as well. That is why various trading software of the brokers like www.oanda.com offer a link to the page containing important news.

• bloomberg.com
• businessweek.com
• economist.com
• money.cnn.com
• markets.ft.com
• reuters.com
• fxstreet.com

3. Use the strategies of money management.

Money management strategies let you win or lose. You should use them to be in a profit. Many traders make too vast investments in every trade and this is not always rational and reminds of a saying: "Expect to make too much and you will make too little, expect to make little and you will make a lot." It means that even if you invest much trying to get a lot on every trade you can lose all and even if you make small investments looking for a small reward you can make a lot in some period.
1% of the total sum of your account is the maximum sum of the potential risk. This is the first rule of the money management. Stop loss and limit orders may help you to follow this rule. This may be the reason of the small profit, especially if you have small initial investments. However, by compounding a part of your profit or the entire amount, you can get an exponentially growing income.
This strategy of compound profits is the one that helped to make millions on financial market instead of gambling that results in losing all investments quickly.
Here is the example of the opposite tactics that many traders follow. Imagine that you have an initial investment of $5,000. You are lucky to possess the trading account and you enter a $1,000 trade. In case the market trends down and you lose your $1,000, then your assets become $4,000. Keep following your strategy and enter a $1,500 trade. Just make sure the market is at its low and remain hopeful that you get your $1,000 back on top of an earned extra $500. Then the market keeps moving against you leaving you with $2,500 on your account, which is only one-half of your starting capital. This is a very difficult situation to recover from.