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Defending Your Capital In Forex

Trading forex is a like being a Formula 1 car driver. There are times when you can fly down the straightaway (fuelled by leverage ratios of 100:1 or more) and then there are times when you better slow down (cutting your leverage ratios to 50:1 or lower) because it’s beginning to look crowded. If you think you’re going to be in the race for a long time, then reducing your leverage ratios to 30:1 might be a good idea, since there might be a lot of curves up ahead. In other words, a successful trader has to be flexible and “roll with the punches”, remembering that there’s a good reason why the 4-hour chart is called “the dealer chart”.
In such a race to profits, capital management techniques become critically important. A loss avoided is a profit saved. A loss that is trimmed quickly is a partial profit saved. Deploying stop losses is an insurance policy against catastrophe. It makes a lot of sense, particularly since they’re free.

Why You Need Capital To Drive Profits In Forex

In Forex, the standard contract is worth 100,000 of whatever forex currency you are trading. If you are deploying a 100:1 leverage ratio, this means that you need to come up with enough cash for that “1”. So, if you’re trading the AUS/USD, that means that a $1 can control $100 of a trading position. (It also means that a 1% move against you will wipe your cash out.) When you launch a 100:1 trade, your trading platform is going to automatically grab that “$1” and not let you use it again until your forex trade is over. So, if you want to trade forex multiple contracts, at the same time, you need to have more than $1in cash, ready to be escrowed.

Capital Defense Is Critical In Forex

You can always tell who is a beginning forex trader because they are always talking about money or cash. In contrast, you can always spot a very experienced forex trader – or expert -because they almost never mention money or cash. Instead, they are obsessed with their trading ratios (i. e., profits/losses/week or month). If you view Forex in this light, you quickly become upset about any loss because you know that “your ratio” just took a direct hit. So, you start to cherry pick your trades, expanding or contracting the number of contracts you deploy at one go and modulating your leverage to fit the volatility of the scene in front of you. In other words, you begin to trade very defensively.

How To Protect Your Forex Capital

The easiest way to increase your profit ratio in Forex is to make sure that you only incur small losses. This means keeping tight stop losses (i. e., 10 pips away) and/or cutting a trade off even before there is a 10-pip loss on the books. Another way to ensure that losses are kept to a minimum is to never front-run a major announcement or event, particularly if a central bank is involved. The ensuing price spike can blow out any stop loss you might have had and you could end up with a severe loss. Trade forex after the fact – not before it. Finally, stick to whatever winning strategy you have. Don’t deviate from your plan for any reason. Rumours are worthless.

 

 

 

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