Lesson 9. Secrets of Money Management
This part of the Forex training is about how to manage capital in the Forex market. Trading currencies is not enough just to learn the basics of technical and fundamental analysis - should also be a clear pattern of management of funds on your deposit. Only together, these tools can lead you to a stable earnings in Forex.
In addition, we should not forget the material preceding sections - to build a profitable trading system requires a mechanism predictions based on historical data and a good psychological preparation. Thus, the secrets of successful trading include four components:
methods of analysis (technical and fundamental);
prediction system on historical data;
psychological training;
scheme management.
You can add to this list as intuition - it is not superfluous in any case. But in this part of the emphasis will be placed precisely on the schemes of capital management.
Martingale strategy has come to us from the world of gambling. Its essence is so trivial, it will be clear even to a child. For simplicity, the "Move" in the casino and "play" in the most common of his game - roulette. For those who are not familiar with a tape measure to clarify that betting on roulette, you can do both on the numbers and the odds. By chance here means loss of even and odd numbers of black and red numbers, numbers, certain sectors, a certain number, etc. In the context of our example, we are interested in a 50/50 chance.
Suppose that the minimum rate at roulette - $ 1. The essence of the martingale strategy is the following. We set the minimum bid for any of the 50/50 chance, suppose on black. If the outcome of throwing the ball has the opposite result (fallen red number), then double the bet and then bet on black. And so on until all the same not want us to fall color. In this case we have a profit again and reset the rate to the original value of $ 1.
It is easy to calculate that profit from such a series of bets will be only $ 1, regardless of the number of unsuccessful outcomes, and the rates for unsuccessful outcome are increasing exponentially. That is, if the red number fell to 6 times in a row, which is quite a common phenomenon in the casino, then to win $ 1 you will have to risk $ 64, but if it fell row 10 times, then $ 1024. As you can see, in this case, the rate commensurate with the size of the payout, but the essence of the martingale strategy is precisely this approach.
Casino is insured against loss due to fans of the strategy, limiting the maximum bet. Therefore, if the maximum bet on the roulette wheel is set at $ 1024, then the following unsuccessful outcome of rotation roulette destroy algorithm martingale strategy and will lead to the inevitable large losses.
An interesting fact is that the martingale strategy can be with no less successfully applied in the Forex market. Its essence is not changed - with each failed transaction we are increasing twice the current size of the lot and re-open the position. This approach is convenient to apply for micro accounts when increasing the size of the lot in geometric progression can not quickly lead to a lack of funds on deposit for your next transaction. By the way, one of the drawbacks of the martingale strategy is precisely the lack of money to cover the wagering. If the size of your deposit will not allow you after yet another failed deal to increase the size of the lot in half, then you will incur huge losses.
The more you make losing trades in a row, the less will be your gain relative to investment, ie percent return on equity (ROI, Return on Investment). With a very large number of failed transactions the process reaches the point of absurdity - to win a few cents, you need to risk a few hundred or even thousands of dollars. It should be noted that the use martingale strategy in its pure form in Forex is not necessary - it will lead to inevitable losses. After all, if it were that simple, then all traders would be millionaires. But to implement this strategy in the already developed a trading system is possible, and sometimes even necessary.
In conclusion, it is worth noting that there is a variety of the above strategy - the strategy of "soft" martingale. The gist of it is that when each failed transaction we increase rate is not twice, but on a number of interest, and at each profitable trade in proportion to its decline. This strategy insures the rapid emptying of the deposit, but not as fast as it returns losses classic version.
In addition to that described in the previous chapter martingale strategy, there is also a strategy "antimartingeyl", the essence of which is as follows. We are increasing at twice the rate (lot size) for each successful transaction and throw it in the minimum allowable bid for each failed.
Consider a simple example. We open position 8th mini lots and close the warrant at a loss. Then, following a strategy "antimartingeyl", we reset the "bid" and open the deal 1st mini lot. When a failed transaction we remain all the same 1st mini lot, and when you close the deal with a profit doubled lot of the open position and continue to trade under this scheme.
An interesting fact is that the strategy "antimartingeyl" gets its common name applied to the financial markets. Many traders embed this strategy in the current trade system in order to organize a competent scheme management. This approach often leads to a significant improvement in the trading system.
For the beginners it is recommended to use this strategy only after the creation of its own mechanical trading system. Otherwise, follow the rules of the strategy is quite difficult, because the emotional component of trading often outweighs the predetermined mathematical algorithm.
No serious organization does not allow itself to waste money right and left. One means of achieving the goal of the organization is the maximum possible reduction in production costs. In other words, any organization in some way produce for themselves the rules of money management. As you know, a lot of capital of large companies is more protected from losses than small private equity investor. Therefore, Internet trader like no other has to work out for themselves the postulates of money management and follow without questions.
Such is human psychology that, having the specific amount of money they want to spend either quickly or rapidly multiply. Neither one nor the other, they cause an increase in capital as the mismanagement of funds can only lead to ruin. Living without money from paycheck to paycheck and can, in fact, so do most Russians. But, reading material of this website, you are most likely looking for an answer to the question of how to break out of the vicious circle of the working week. Therefore, the first postulate in this way it should stand normally follow the postulates listed below:
Trading on the Forex market, do not use open positions more than 10-15% of the free equity. Opening the position of a large amount, you run the risk of margin call before the price will be developed in the desired direction.
When you open a position is always expose the stop-loss level and, if possible, take-profit. This approach in itself reflects a systematic and disciplined trading, which is the key to success in the financial markets. The level of stop-loss should not exceed 5% available to the trader's capital.
It is not recommended to open positions more than 5 different currency pairs, it is known that a person's attention can not simultaneously hold more than 4-6 objects.
Diversify risks and at the same time, do not open positions in currencies that have a high degree of correlation. This approach can be detrimental affect on your deposit.
With the proper level of training is desirable to trade in several financial markets at the same time, performing operations not only with the currency, but also equities, futures, options and precious metals. This will further diversify your risks, because, as you know, "do not put all your eggs in one basket."
Currencies of some countries are heavily dependent on the export of certain types of raw materials, ie, are trademarks, trade should therefore take this into account and use it to their advantage. It is not necessary to open the same position on the correlated trading tools.
We have listed the basic tenets of money management, but each of you has the right to develop its own inherent in his character and temperament. Regardless of the set of postulates you use in trade fair is one - it is their importance to trade in the Forex market.
Every trader sooner or later begins to excite the question of taxation received forex income, because as they say in the famous quote - "Pay taxes and live peacefully." Unfortunately, with the payment of taxes on the Forex is not that easy as we would like, so this part of our study we will examine this issue in detail.
At first glance, Forex refers to the financial markets, even as the stock market (stock market). At first glance it may seem that the principle of taxation is the same in both markets. In fact this is not true. Security - a financial asset and the Russian law very strictly prescribed all the nuances of working with this type of asset.
From the point of view of taxation of securities transactions should note the following. The tax is paid only when the security is sold, and if the bid price of the security to the tax agent is unknown, the seller is obliged itself to pay tax on the income of natural persons (PIT) and submit an income tax return. If the tax agent known purchase price of the securities prior to the sale, then he shall pay for the income tax and the client is obliged to provide him with a form 2-PIT on demand.
When it comes to the stock exchange, then in relation to private traders to purchase online securities are without supplies, with the obligatory reverse a sale. Hence, the broker knows the purchase price and the selling price of a financial asset and must itself pay tax to the State. Of course, this is true only brokers registered in the Russian Federation. Brokers registered, for example, in offshore areas, will not take you for any returns were - in this case, the burden of taxes fall on your shoulders at your own risk.
As for the Forex market, the concept of a financial asset as such it is not. There is a pure currency trading, but without its actual delivery. Moreover, trading on a mini account, a trader, in fact, playing against a broker, as a warrant for mini accounts in the interbank market is not exposed. Consequently, this type of activity can be safely classified as a species of gambling, and the broker is not much different from the bookmaker.
Until recently, the picture with the payment of taxes in the Forex market has been eroded. But the February 4, 2009 the Ministry of Finance of the Russian Federation issued a letter № 03-04-05-01/41 «On taxation of personal income tax on the same basis income of an individual, resulting from transactions in the market Forex». The text of the letter is provided below.
The Tax and Customs Tariff Policy considered the letter on taxation of income derived from transactions in Forex, and in accordance with Art. 34.2 of the Tax Code of the Russian Federation (hereinafter - the Code) explain the following.
In accordance with paragraph 1 of Art. 209 of the Code subject to taxation for individuals who are tax residents of the Russian Federation shall be income derived by them from sources in the Russian Federation and (or) from sources outside the Russian Federation.
In addition, Art. 210 of the Code establishes that in determining the tax base all the income of the taxpayer, he received both in cash and in kind, or the right to dispose of whom had arisen, as well as income in the form of material benefit, as determined in accordance with Art. 212 of the Code.
Thus, the income derived by the taxpayer from transactions in the Forex, is liable to tax on income of individuals on the same basis using rates set by Section 1, Art. 224 of the Code.
Deputy director
Department of Tax
Customs and Tariff Policy
N.A.KOMOVA
As you can see, in the government's attempt to find new sources of tax revenues to the treasury, under a broom and hit trade in the Forex market. Despite this, the tax is unlikely in the near future to arrange a "crackdown on traders", because to determine the fact of trading with a broker registered in an offshore zone is problematic. As for the Russian brokerage companies and banks, it is likely, such a tax would be paid automatically when you try to withdraw funds to the account. In the end, decide whether to pay tax or not, it's certainly you.
This part of the Forex training is about how to manage capital in the Forex market. Trading currencies is not enough just to learn the basics of technical and fundamental analysis - should also be a clear pattern of management of funds on your deposit. Only together, these tools can lead you to a stable earnings in Forex.
In addition, we should not forget the material preceding sections - to build a profitable trading system requires a mechanism predictions based on historical data and a good psychological preparation. Thus, the secrets of successful trading include four components:
methods of analysis (technical and fundamental);
prediction system on historical data;
psychological training;
scheme management.
You can add to this list as intuition - it is not superfluous in any case. But in this part of the emphasis will be placed precisely on the schemes of capital management.
Martingale strategy has come to us from the world of gambling. Its essence is so trivial, it will be clear even to a child. For simplicity, the "Move" in the casino and "play" in the most common of his game - roulette. For those who are not familiar with a tape measure to clarify that betting on roulette, you can do both on the numbers and the odds. By chance here means loss of even and odd numbers of black and red numbers, numbers, certain sectors, a certain number, etc. In the context of our example, we are interested in a 50/50 chance.
Suppose that the minimum rate at roulette - $ 1. The essence of the martingale strategy is the following. We set the minimum bid for any of the 50/50 chance, suppose on black. If the outcome of throwing the ball has the opposite result (fallen red number), then double the bet and then bet on black. And so on until all the same not want us to fall color. In this case we have a profit again and reset the rate to the original value of $ 1.
It is easy to calculate that profit from such a series of bets will be only $ 1, regardless of the number of unsuccessful outcomes, and the rates for unsuccessful outcome are increasing exponentially. That is, if the red number fell to 6 times in a row, which is quite a common phenomenon in the casino, then to win $ 1 you will have to risk $ 64, but if it fell row 10 times, then $ 1024. As you can see, in this case, the rate commensurate with the size of the payout, but the essence of the martingale strategy is precisely this approach.
Casino is insured against loss due to fans of the strategy, limiting the maximum bet. Therefore, if the maximum bet on the roulette wheel is set at $ 1024, then the following unsuccessful outcome of rotation roulette destroy algorithm martingale strategy and will lead to the inevitable large losses.
An interesting fact is that the martingale strategy can be with no less successfully applied in the Forex market. Its essence is not changed - with each failed transaction we are increasing twice the current size of the lot and re-open the position. This approach is convenient to apply for micro accounts when increasing the size of the lot in geometric progression can not quickly lead to a lack of funds on deposit for your next transaction. By the way, one of the drawbacks of the martingale strategy is precisely the lack of money to cover the wagering. If the size of your deposit will not allow you after yet another failed deal to increase the size of the lot in half, then you will incur huge losses.
The more you make losing trades in a row, the less will be your gain relative to investment, ie percent return on equity (ROI, Return on Investment). With a very large number of failed transactions the process reaches the point of absurdity - to win a few cents, you need to risk a few hundred or even thousands of dollars. It should be noted that the use martingale strategy in its pure form in Forex is not necessary - it will lead to inevitable losses. After all, if it were that simple, then all traders would be millionaires. But to implement this strategy in the already developed a trading system is possible, and sometimes even necessary.
In conclusion, it is worth noting that there is a variety of the above strategy - the strategy of "soft" martingale. The gist of it is that when each failed transaction we increase rate is not twice, but on a number of interest, and at each profitable trade in proportion to its decline. This strategy insures the rapid emptying of the deposit, but not as fast as it returns losses classic version.
In addition to that described in the previous chapter martingale strategy, there is also a strategy "antimartingeyl", the essence of which is as follows. We are increasing at twice the rate (lot size) for each successful transaction and throw it in the minimum allowable bid for each failed.
Consider a simple example. We open position 8th mini lots and close the warrant at a loss. Then, following a strategy "antimartingeyl", we reset the "bid" and open the deal 1st mini lot. When a failed transaction we remain all the same 1st mini lot, and when you close the deal with a profit doubled lot of the open position and continue to trade under this scheme.
An interesting fact is that the strategy "antimartingeyl" gets its common name applied to the financial markets. Many traders embed this strategy in the current trade system in order to organize a competent scheme management. This approach often leads to a significant improvement in the trading system.
For the beginners it is recommended to use this strategy only after the creation of its own mechanical trading system. Otherwise, follow the rules of the strategy is quite difficult, because the emotional component of trading often outweighs the predetermined mathematical algorithm.
No serious organization does not allow itself to waste money right and left. One means of achieving the goal of the organization is the maximum possible reduction in production costs. In other words, any organization in some way produce for themselves the rules of money management. As you know, a lot of capital of large companies is more protected from losses than small private equity investor. Therefore, Internet trader like no other has to work out for themselves the postulates of money management and follow without questions.
Such is human psychology that, having the specific amount of money they want to spend either quickly or rapidly multiply. Neither one nor the other, they cause an increase in capital as the mismanagement of funds can only lead to ruin. Living without money from paycheck to paycheck and can, in fact, so do most Russians. But, reading material of this website, you are most likely looking for an answer to the question of how to break out of the vicious circle of the working week. Therefore, the first postulate in this way it should stand normally follow the postulates listed below:
Trading on the Forex market, do not use open positions more than 10-15% of the free equity. Opening the position of a large amount, you run the risk of margin call before the price will be developed in the desired direction.
When you open a position is always expose the stop-loss level and, if possible, take-profit. This approach in itself reflects a systematic and disciplined trading, which is the key to success in the financial markets. The level of stop-loss should not exceed 5% available to the trader's capital.
It is not recommended to open positions more than 5 different currency pairs, it is known that a person's attention can not simultaneously hold more than 4-6 objects.
Diversify risks and at the same time, do not open positions in currencies that have a high degree of correlation. This approach can be detrimental affect on your deposit.
With the proper level of training is desirable to trade in several financial markets at the same time, performing operations not only with the currency, but also equities, futures, options and precious metals. This will further diversify your risks, because, as you know, "do not put all your eggs in one basket."
Currencies of some countries are heavily dependent on the export of certain types of raw materials, ie, are trademarks, trade should therefore take this into account and use it to their advantage. It is not necessary to open the same position on the correlated trading tools.
We have listed the basic tenets of money management, but each of you has the right to develop its own inherent in his character and temperament. Regardless of the set of postulates you use in trade fair is one - it is their importance to trade in the Forex market.
Taxation on Forex
Every trader sooner or later begins to excite the question of taxation received forex income, because as they say in the famous quote - "Pay taxes and live peacefully." Unfortunately, with the payment of taxes on the Forex is not that easy as we would like, so this part of our study we will examine this issue in detail.
At first glance, Forex refers to the financial markets, even as the stock market (stock market). At first glance it may seem that the principle of taxation is the same in both markets. In fact this is not true. Security - a financial asset and the Russian law very strictly prescribed all the nuances of working with this type of asset.
From the point of view of taxation of securities transactions should note the following. The tax is paid only when the security is sold, and if the bid price of the security to the tax agent is unknown, the seller is obliged itself to pay tax on the income of natural persons (PIT) and submit an income tax return. If the tax agent known purchase price of the securities prior to the sale, then he shall pay for the income tax and the client is obliged to provide him with a form 2-PIT on demand.
When it comes to the stock exchange, then in relation to private traders to purchase online securities are without supplies, with the obligatory reverse a sale. Hence, the broker knows the purchase price and the selling price of a financial asset and must itself pay tax to the State. Of course, this is true only brokers registered in the Russian Federation. Brokers registered, for example, in offshore areas, will not take you for any returns were - in this case, the burden of taxes fall on your shoulders at your own risk.
As for the Forex market, the concept of a financial asset as such it is not. There is a pure currency trading, but without its actual delivery. Moreover, trading on a mini account, a trader, in fact, playing against a broker, as a warrant for mini accounts in the interbank market is not exposed. Consequently, this type of activity can be safely classified as a species of gambling, and the broker is not much different from the bookmaker.
Until recently, the picture with the payment of taxes in the Forex market has been eroded. But the February 4, 2009 the Ministry of Finance of the Russian Federation issued a letter № 03-04-05-01/41 «On taxation of personal income tax on the same basis income of an individual, resulting from transactions in the market Forex». The text of the letter is provided below.
The Tax and Customs Tariff Policy considered the letter on taxation of income derived from transactions in Forex, and in accordance with Art. 34.2 of the Tax Code of the Russian Federation (hereinafter - the Code) explain the following.
In accordance with paragraph 1 of Art. 209 of the Code subject to taxation for individuals who are tax residents of the Russian Federation shall be income derived by them from sources in the Russian Federation and (or) from sources outside the Russian Federation.
In addition, Art. 210 of the Code establishes that in determining the tax base all the income of the taxpayer, he received both in cash and in kind, or the right to dispose of whom had arisen, as well as income in the form of material benefit, as determined in accordance with Art. 212 of the Code.
Thus, the income derived by the taxpayer from transactions in the Forex, is liable to tax on income of individuals on the same basis using rates set by Section 1, Art. 224 of the Code.
Deputy director
Department of Tax
Customs and Tariff Policy
N.A.KOMOVA
As you can see, in the government's attempt to find new sources of tax revenues to the treasury, under a broom and hit trade in the Forex market. Despite this, the tax is unlikely in the near future to arrange a "crackdown on traders", because to determine the fact of trading with a broker registered in an offshore zone is problematic. As for the Russian brokerage companies and banks, it is likely, such a tax would be paid automatically when you try to withdraw funds to the account. In the end, decide whether to pay tax or not, it's certainly you.
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