Whether you are a new forex trader just starting out or an experienced trader with a lot of capital, protecting your trading capital should be priority number 1.
Don’t make the same mistake so many traders before you have already made. So many traders, especially new traders enter into Forex trading and instantly blow their account. They may do this a few times before becoming discouraged and walking away from trading all together.
Learning from their mistakes and putting a focus on protecting trading capital from the onset of your trading journey is important. Learning to protect your capital gives you the ability to stick around for the long haul, and sets you up for the best chance at success.
Larger Trading Capital Means Bigger Profits
Look, one of the realities of Forex trading is that most traders start out because they want to make money.
One of the key things to understand about trading is that those with more capital stand to benefit the most financially.
Let’s break that down.
Trader 1, let’s call him Tom, is trading with a $5,000 account. Tom has a strategy where he risks 2% of his account per trade and his average risk-to-reward ratio is 1.5. With 2% risk he stands to lose $100 on his losing trades and lock in $150 of profits on each winning trade.
For Tom to grow his account to $10,000 it would take 50 winning trades if he never took a single loss.
That is unrealistic though as very few traders in the world have a 100% win rate on 50 trades. In reality, it would take Tom a long time to acheive his 100% return on his account, which would only amount to $5,000. The growth Tom can achieve is stunted by the fact that his pool of capital is relatively small.
Tom’s Brother George on the other hand is trading with $500,000 of trading capital. If George also risks 2% per trade and has the same 1.5RR, that means he stands to lose $10,000 on each losing trade and earn $15,000 for each winning trade.
With just one trade, George can earn more profit than Tom’s entire account, simply due to the fact that he has a larger pool of trading capital.
In fact, for George to earn a decent living from trading he doesn’t need to risk that much per trade. This is why you see traders and hedge funds with large amounts of capital risking less % per trade – they earn enough money from 0.25% risk per trade. So why increase your risk when you do not have to.
Protect your trading capital!
If you are like Tom and are just starting out on your trading journy with $5,000 then protecting your trading capital must be your highest priority if you want to grow your account. If you don’t, you will lose money and growing your capital will take even longer.
For new traders this is really important to your long-term success. Taking risks or gambling your account may net you some short-term gains, but over the long-term it is not sustainable.
The house will always win.
So, it is important that when starting your trading journey you educate yourself on protecting your trading capital. Having controls and barriers in place is fundamental to finding success in forex trading.
Let’s dig deeper into what some of those barriers might look like.
Look After Your Cash!
Have a Predefined % Risk Per Trade
Having strict rules in place is the best first step you can take to protect your capital. That means you should have a maximum % risk per trade that you never exceed.
Many traders, even professional traders violate this rule. As traders we will do our trading analysis, come up with the perfect trade that is “guaranteed” to be a winning trade, and we load up on the trade, violating our % risk per trade rule.
Increasing your % risk on trades you think are going to be a “guaranteed” win is a quick way to blow your account. Even the famed Jesse Livermore violated this simple rule more than once during his trading career. The Result?? You guessed it, he blew his account.
Take into Consideration the Number of Open Trades
When calculating your % risk per trade you also need to consider how many open trades you have at the same time. Having 5 trades open at 2% risk each is not sensible – if all of these trades are losses you stand to lose 10% of your account! So, while trading and protecting your trading capital make sure to factor in both the % risk per trade, as well as the total number of open trades you have at any given time.
Don’t put all your cash into your account
Another important thing to consider is that you might not need all of your trading capital in your account. Most brokers, Retail Prop Firms, and Trading Competition platforms such as BullRush give you a lot of leverage to trade with. This results in you as the trader not needing to have as much money in your account. If you are trading your own personal account, you can keep that money in your personal bank account. Far away from your trading account where it is safer.
If it is not in your trading account you cannot lose it by violating trading capital protection rules.
Small decisions like this all factor into your financial security whilst trading and serves to protect you from unforeseen circumstances.
Protecting your trading capital is not complicated to do but a realization every trader needs to come to is that you are your own worst enemy.
Crafting The Best Trading Mindset
Your mindset dictates more of your trading than you will realize.
This comes in the form of problems like chasing trades, exiting early, increasing your risk % per trade, and many more.
One of the biggest lessons you can learn is that your mindset toward your trading is arguably the biggest determinant of whether you succeed as a trader.
There are countless trading strategies out there, but with each one you will always come up against yourself as your own worst enemy.
Do you struggle with greed? Are you impatient? Do you fear losing trades once they are in the green?
Crafting the best trading mindset is going to go a long way in helping you find profitability and long-term success in forex trading.
Mastering these psychological hurdles is vital.
Too many times traders will have a game plan, however, after a few bad trades they go on tilt and throw all risk rules to protect their trading capital out the window.
Even on the other end you see it. A trader will have a few successful days trading in a row. The greed then sets in and they believe they are the best trader in the world. They drastically increase their % risk per trade or deposit more money into their account. Many times resulting in them blowing their account because they did not have a good trading mindset.
Keeping an even keel when trading and sticking with your objective trading plan are keys to protecting your trading capital. Simply put, place a limit on your % risk per trade and stick to it – don’t give in to greed, fear, or impatience.
It will be tempting and you will be able to justify giving into yourself every time, but that is your subjective mind superseding your objective rules, something you definitely want to avoid.
It takes time to craft your trading mindset but doing so will help you protect your trading capital by protecting you from yourself!
If you can recognize your weaknesses and take proactive steps to countering them, I guarantee you will find that your trading improves. That comes from seeing hundreds of traders go through the process.
Ultimately, for independent traders you are your own boss and that means you need to take responsibility for your capital.
In more ways than one, you are running your own business.
Dedicate the time and effort into protecting your trading capital and you will reap the benefits. Take those first, easy steps and keep the ball rolling!