How To Be Successful In The Forex Market – Preserve Your Capital

Capital preservation is the key to trading success at all levels, from the small individual trader to the sophisticated large hedge fund manager, and it must be goal number one. Without sufficient capital, a player cannot participate in the markets. In the warning statement, the CFTC states that “The high degree of leverage can work against you as well as for you.” A common error of new traders is overleveraging their trading capital. 

Later in the chapter I discuss how to calculate your leverage and recommend a common sense approach to how much of your trading capital to put at risk on any given trade. 

The Inside Scoop 

Typically, it seems that traders don’t come to us until they are about to blow their accounts. The source of the problem is usually a lack of discipline that turned a manageable loss into a crisis situation. I remember one instance where a trader who used to be in regular contact disappeared from sight. I sensed something was amiss when attempts to contact him went unanswered. He was embarrassed to tell what happened as he saw the capital in his account dwindle. Read also how to be successful in the forex market

With each passing day, by the time he contacted me, he had already blown his account. The problem started with a short-term trade taken following the release of some economic news. The market moved against him and he never recovered. An attempt to earn 20 pips wound up losing over 700 pips as the market trended the other way. Doubled-up trades failed. Hope replaced solid analysis. Prudent money management and discipline were tossed aside. Proper risk/reward measurement had long since passed. 

In situations like this, when a trader asks for advice on a losing position (I would hope before it reaches a critical point), I ask one question: “If you were to start with a clean slate right now, would you take this position?” If the answer is no, then the trader has answered his own question and should exit the position. If asked for my advice before a trade is placed, I ask: “What is your profit target and what is your stop?” This is because a trader needs to establish a risk/reward objective on a trade before trading. Also, one must have a stop in place in order to live to trade another day if the trade does not work out as planned. Read also how To Trade With Profit Arcade

What Is Leverage In Forex Trading? 

Since outright percentage price moves in currencies often tend to be significantly smaller than those on equities or on some commodities, a 10 to 20 percent annual price swing in the value of one currency versus another is considered to be substantial. FOREX trading in the commodity markets or with an online broker is done on a leveraged basis to amplify (or leverage) potential trading gains or losses. In other words, a small margin deposit can buy control over a much larger position. A margin deposit is best described as good-faith or earnest money. It in no way limits the potential loss on a position. The buyer or seller of a position in the FOREX market is liable for any losses on the full position, and of course would benefit from any gains. For example: 

A USD500 margin at some firms might control 

A EUR100,000 position (equal to $148,000 at an exchange rate of EUR/USD 

1.4800). 

Leverage is often expressed as a ratio: 

Leverage = Trading Position/Required Margin 

Thus in our example: 

EUR100,000 @ 1.4800 = USD148,000 

The Basics Of Forex You Need To Know As Forex Trader 

The typical required margin is USD500: 

USD148,000/USD500 = 296 

The leverage is: 296:1 

On the regulated commodity exchanges, the comparable FOREX leverage might be about 65:1. Some FOREX brokers advertise leverage as high as 400:1. Read also how to send money with world remit

Example Of A Hypothetical Trade 

With a trading margin of USD500 controlling a EUR100,000 (USD148,000 equivalent) position, A 1 percent increase in the value of the EUR/USD would generate a gain of $1,480 on a long position. A 1 percent decline in the value of the currency would generate a comparable loss of $1,480 — and as an account holder, you would be liable to make good on the entire loss. 

Calculation: 

A EUR100,000 position is worth USD10 per one-pip movement. 

A 1 percent change in the value of the EUR/USD would be: 

.01 × 1.4800 = .0148 

.0148 = 148 pips (smallest whole number) +148 pips × $10 per pip = $1,480 gain 

Note: Some firms now quote prices in fractions (tenths) of a pip. Leverage is a powerful force that can work for or against the currency speculator. Because it is so powerful, we recommend that traders of all levels of experience keep their leverage well below the levels allowed by most online firms. Remember that capital preservation is the number one goal of the trader. Here is some money management advice from a successful North American dealer: 

If you’re long USD like I am, you need to make sure your money management is in order. That means appropriate stops, appropriate leverage, appropriate position sizing with respect to your account size. 

The Importance of Money Management In Forex Trading 

If the position moves too far against you, then don’t be afraid to accept the loss. It’s better to live and fight another day than to draw down your account so much that you can’t trade anymore. 

Keep in mind that the account holder is held financially liable for the full losses taken on any account regardless of the margin initially required. A missed margin call (demand for additional funds) will see the trading position closed swiftly by the broker to limit its exposure to losses, and the broker will pursue the account holder for any deficit in the account. 

Money Management Rules 

Some simple guidelines may help keep you in the game long enough to learn winning ways. Breaking even is okay, too. Go slow. If you are new to trading, start out with one of the paper-trading demo accounts offered by most brokerage firms. Get a feel for the mechanics of trading and for how the markets operate. Read the free Global-View FOREX Forum. Use the Learning/Help Forum to ask questions about how to trade. On the FOREX Forum you will see a lot of trading ideas posted by a wide range of traders 24 hours a day when the markets are open. You will also see a wide range of trading styles. Pick some posters you like and follow their trading ideas and how they make their decisions. Don’t look for them to tell you what to do. Read also how to protect your credit cards online

In the end, it’s YOUR decision how to manage your money, not theirs. Develop your own trading approach as quickly as possible. Start out with a mini-account. Trading with real money is a lot different than paper trading. Try out a mini-account and keep your leverage low. Forget the dollar value of your profit/loss (P/L). Trade for pips. 

You can always increase your leverage later. In the ideal case, you might be able to fund a full-sized account with the profits from your mini. Take your time! Expect to have many losing trades. They come with the territory in FOREX trading. If you talk to some of the professionals in the big institutions who have survived for many decades, the best will tell you that the markets have taught them humility. Most will say that they would be happy to be correct 51 percent of the time. They will also tell you that, given the global scope of the markets, things often happen that surprise even the most experienced participants. 

Do you have idea/suggestion or contribution? Please leave a comment below with your thought. 

Thank you for visiting my blog and your time to reading the post. Hope to see you here again.