Whether you are a new forex trader just starting out or an experienced trader with a lot of capital, protecting your capital is something that every trader should have in common.
Not only that, it should be your highest priority throughout your trading career. This goes beyond just the simple act of protecting your own financial assets.
Protecting your capital will be a HUGE benefit to multiple aspects of your trading.
Don’t make the same mistake so many traders before you have already made. Learning from these lessons has helped me to grow my capital and trading habits, resulting in my success as a forex trader.
So if you want to find sustainable profitability in your trading, read on!
Larger 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.
Let’s break this down.
Tom is trading with $5,000. 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 losses and lock in $150 of profits for each won trade.
For Tom to grow his account to $10,000 it would take 50 winning trades if he takes on 0 losses.
That would take time because there will inevitably be losses. The growth Tom can achieve is stunted by the fact that his pool of capital is relatively small.
Tom’s Brother – George – is trading with $500,000. If George also risks 2% per trade and has the same 1.5RR, that means he stands to lose $10,000 on each loss and take in $15,000 for each win.
With just one trade, George can earn more money than Tom’s entire account, simply due to the fact that he has a larger pool of capital.
In fact, for George to earn a living he doesn’t need to risk that much per trade. This is why you see traders and funds with large amounts of capital risking less % per trade – they earn enough money from 0.25% risk per trade.
This shows how important it is to protect your capital.
If you are like Tom and are starting out with $5,000 then protecting your 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 independent traders this is really important to your long-term success. Taking risks or gambling your account may net you some short-term wins, but over the long-term it is not sustainable.
The house will always win.
So putting barriers in place to protect your capital and enable you to grow your account 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!
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.
Forex4noobs has helped thousands of traders with forex trading and this simple rule is one that is too often ignored.
Increasing your % risk on trades you think are going to be a guaranteed win is a quick way to blow your account. I have seen it countless times and the story is the same every time.
You should also consider what the maximum number of open trades you can have open at any one time should be. Having 5 trades open at 2% each is not sensible – if all of these trades are losses you stand to lose 10% of your account!
Errors like this will slow your account growth and trading capital, losing you time and likely motivation as well.
Another important note is to factor in how much of your capital you put into your actual trading account.
It is not necessary to place all of your trading capital into your brokerage account. You can keep a large portion of it in your own bank accounts where it will be safer.
Small decisions like this all factor into your financial security whilst trading and serves to protect you from unforeseen circumstances.
Protecting your 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 I have learned throughout my trading career is that your mindset toward your trading is arguably the biggest determinant of whether you succeed.
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.
And it all starts with simple, objective rules that you can follow. Put 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 we definitely want to avoid.
It takes time to craft your trading mindset but doing so will help you protect your 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 capital and you will reap the benefits. Take those first, easy steps and keep the ball rolling!