There are three fundamental factors for success in trading the stock markets, Forex, and cryptocurrencies, and neglecting or paying insufficient attention to any of them will inevitably lead to failure for the trader in this profession:
1. Trading Strategy
2. Volume Management Strategy
3. Psychology and Emotion Management
In this article, I aim to share my 20 years of knowledge and experience regarding volume management strategies in a complete, simple, and practical manner, aligning with the latest international knowledge in this field.
By thoroughly reading this article, you will become familiar with various volume management strategies and can easily and quickly use whichever is suitable for you through the calculators provided by the Chartical programming team.
First, we need to understand the necessity of volume management.
Survival in the stock markets, Forex, and cryptocurrencies is one of the fundamental and vital principles for traders in these markets. These markets, being highly risky and dynamic, offer emotional and intense experiences for traders. Hence, survival is considered one of the main priorities for achieving success in these markets.
Here, we will explore the strategies for survival in trading:
Trading markets are characterized by rapid and unexpected price changes. According to behavioral economics, the only certainty in the market is uncertainty, and any trade could be the one where the stop-loss is triggered.
Survival here is achieved by reducing and eliminating trades with lower probabilities. This allows you to remain in the market and make the most of its potential and your own.
However, first, let's define risk correctly in trading. Contrary to common belief among traders, risk does not mean the percentage/volume of financial loss in case of a losing trade. Instead, the amount of risk is exactly the percentage probability of a trade's failure.
In fact, the financial loss in case of a losing trade is the cost of the trade, not its risk, and the Chartical strategy fully teaches how to reduce and optimize trade costs. Therefore, the correct definition of risk in trading principles is the percentage probability of a trade's failure. The higher the probability of a trade failing, the higher its risk, and the lower the probability of a trade failing, the lower its risk.
As a result, to have lower-risk trades, we should trade positions with a higher probability of success, which can easily be identified through Chartical clues.
News, statistics, and economic events can cause significant changes in the Forex market. Implementing a management and exit strategy can help you mitigate the unintended effects of this news and bring you closer to success.
I recommend not entering new trades one hour before and after the release of economic news and statistics, and managing open trades based on the risk-free trade management strategy or setting the stop-loss within the profit range.
To learn the management and exit strategies, you can watch the videos or read the Chartical training book, and for practical skills, participate in our workshops and coaching sessions.
One of the main principles of survival in stock, forex, and cryptocurrency markets is capital protection. By using appropriate volume management and avoiding excessively large trades that can endanger your capital, you can preserve your funds and utilize their full potential for account growth. Various formulas exist for trade volume management, but unfortunately, many traders use basic and inefficient ones.
The goal of this article is to provide you with a range of volume management formulas, from the most basic to the most optimized, with a discussion of the strengths and weaknesses of each, allowing you to choose the best one for your trading conditions and use it easily and quickly through calculators available on the Chartical website.
Participating in psychological coaching and private psychotherapy sessions from Chartical can help you keep your emotions under control. Measuring and controlling yourself in the face of price changes allows you to make more rational decisions and avoid wrong decisions caused by tension and anxiety.
The cost of a trade equals the difference between the entry level and the initial stop-loss. For example, if you enter a buy trade at a price of 1000 with a stop-loss set at 900, and assuming the trade volume is 1 lot, your trade cost is 1000 dollars.
To reduce trading costs, you should optimize your entry edge by entering trades with the first valid clues rather than waiting for the breakout of levels or signals from patterns, indicators, or oscillators, which increases the distance from the entry edge to the initial stop-loss.
Many traders mistakenly believe that to optimize the entry edge, they should move to lower timeframes after identifying a position. However, this only increases the trade risk as a natural price fluctuation can take the trade out of the market.
Chartical strategy offers practical and professional solutions for reducing trading costs that you need to learn and master through free educational videos, workshops, and specialized coaching sessions.
Trading with a precise and efficient strategy is very important. This strategy should have specific rules and guidelines to assist you in your trades. The characteristics of an efficient strategy include having precise and scientific clues that provide you with the entry edge, initial stop-loss, and exit management with the least risk and cost.
Based on 20 years of trading experience, I recommend the Chartical strategy.
The most ignorant claim in trading is to say, "I have learned everything, my skills are sufficient to make profits, and there is nothing more to learn." Remember that the only master of trading is the price itself, and anything else is just a claim because the price constantly changes due to market cycle shifts, liquidity growth, market-making policy improvements, and advances in behavioral economics knowledge. This is one of the positive aspects of efficient markets because it constantly filters traders, leaving opportunities for professional traders.
Volume management is one of the fundamental and vital principles in stock, forex, and cryptocurrency trading. Professional traders know that volume management not only reduces losses but also enhances the ability to profit from price changes and increases profitability. Here is the importance and necessity of volume management in forex trading:
1. Capital Protection: One of the main principles of volume management is to protect your capital. By using appropriate volume management strategies, you can reduce unwanted losses and preserve your capital. This means that even in the face of unexpected market price changes, your capital will not be significantly affected.
2. Psychological Peace and Confidence: Proper volume management can help maintain your psychological peace. When trade volumes are too large or too small, they can affect your emotions, leading to wrong decisions and significant losses.
3. Taking Advantage of Opportunities: Proper volume management allows you to maximize your profits from trades. By having sufficient capital and effectively using volume management formulas suited to your conditions, you can better profit from price changes.
In general, volume management is crucial in trading. Professional traders always carefully use appropriate volume management based on current conditions to reduce costs and increase profits.
Types of Risk Management Approaches:
1. Risk Balancing: In this model, the volume of each trade is determined based on its relative risk compared to other trades. This means that if a trade has higher risk, a smaller volume of capital is allocated to it. As I mentioned earlier, risk in trading means the percentage probability of trade failure. Therefore, the higher the trade risk, the lower the trade volume should be, regardless of the formula used to calculate it.
Example: Suppose a trade has a stop-loss of 50 pips, and the volume management formula suggests 10 lots. Due to weaker clues, this trade has higher risk than others, so the volume should be reduced accordingly, say to 7 lots. Conversely, if the trade has stronger clues and hence lower risk, the volume should be increased, say to 12 lots.
Always remember that your trading costs should be within 20% of your margin call level, and your free margin percentage should not fall below 1000%.
2. Adaptive: In this model, the trade volume is adjusted based on the trader's past performance. If the trader has been successful, the trade volume increases; if not, it decreases.
3. Multiple Criteria: This model evaluates several criteria, such as risk, expected return, and other financial indicators, to determine the trade volume. Due to the combination of multiple risk-balancing and adaptive formulas, these models are complex because they must calculate the risk of the current trade based on the trader's past performance, without any relation to price charts.
1. Fixed Percentage: This formula does not fall under any risk management models and is the most basic volume management formula. At the beginning of trading markets, the fixed percentage was the only method traders could use to manage trade costs due to the lack of advanced financial management knowledge.
The advantage of this formula is that it prevents a loss greater than the trader's financial and psychological tolerance. However, the drawback is that regardless of the trader's capital, knowledge, and skill, they are limited to a fixed percentage profit, making no distinction between novice and professional traders.
As a result, this formula is useful for novice traders to avoid severe losses from trading challenges and market risks and to gain experience and skills. It can also be recommended by a coach or therapist for traders who should neither stop trading in real markets nor be exposed to emotional stress while improving their weak points.
So, if you are a novice, you should use this formula.
2. Stepped Fixed Percentage: This volume management formula also does not fall under any risk management models and is merely an advanced version of the fixed percentage. In this formula, part of the trader's capital is ignored, and the fixed percentage is calculated based on the remaining capital.
Example: A trader has a capital of $50,000, and $10,000 is ignored for this formula, so the fixed percentage is calculated based on $40,000. If the upcoming trade fails, the trader's loss is proportional to the smaller amount rather than the entire capital.
The advantage of this formula is that the trader experiences less financial and psychological pressure compared to the fixed percentage in failed trades. However, the drawback is that the trader also benefits less from their capital's potential profits.
Except for a coach or therapist's recommendation, there is no reason for a trader not to utilize their entire capital potential, as they could have invested the ignored amount in another job.
3 – Incentive Volume Management: The incentive volume management formula does not align with any risk management models and only suggests a trade volume based on the pip value of the stop-loss and the trade cost determined by the trader.
This formula is only recommended for professional traders, as its use by novice or average traders can lead to significant financial and psychological losses.
Traders who can use this formula should have their trading performance score in the green zone.
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