Capital preservation is just as important as making profits as a trader. The forex market can be volatile and unpredictable. Therefore, you need to find ways to protect yourself against the detrimental effects of the highly volatile conditions. As a forex trader or business owner, here are five things you should do to preserve your trading capital.
Choose a Reputable Broker
Choosing the right broker is critical to your success in the financial markets. Your broker provides a platform for you to analyse the markets, execute trades and manage them. Trading with a reputable broker ensures that your capital is protected at all times because the appropriate regulatory agencies regulate these brokers.
Unregulated brokers do not follow any laid down rules and regulations, and as such, trading with these brokers puts your capital at risk. The lack of regulation makes it difficult to hold them accountable in case of disputes and crises. It also provides room for the broker to manipulate your trading processes and trade orders, leading to loss of funds. Not all unregulated agents have malicious intent, but trading with regulated brokers like Oanda secures your capital and protects your interests.
Trade With a Profitable Strategy
Before putting live funds at risk, you need to ensure that your trading strategy is profitable, meaning it should be able to produce enough wins to mitigate the losses and make net profits after a series of trades. Forex business owners often lose their funds due to inadequate trading strategies that provide little to no edge in the forex market.
You can test your trading strategy by backtesting on the price charts. This involves reviewing past price data to see how well your trading strategy would have performed. Having this result helps you estimate the win rate and potential of your trading strategy. You can also evaluate your trading strategy by executing transactions on a demo trading account.
A trading strategy gives you an edge in the forex market because it helps you to determine the most likely direction of price movement. Having a plan and systematic approach is what makes trading different from gambling. A profitable strategy removes the guesswork and ensures that you’re only engaging in high-probability trades that have a significant likelihood of providing a favourable outcome.
Use Proper Risk Management
While trading forex, ensure you use effective risk management strategies to protect your capital from losses that cannot be mitigated. No matter how good a trading strategy is, it won’t make consistent profits without risk management. Practice this by pre-determining your risk before executing trades, thus ensuring that your risk exposure is somewhat consistent, making it easier to recover losses. You can limit your risk with stop loss orders. A stop loss order is a command that permits the broker to close out your trades when price trades to a specific point that will invalidate them.
While managing risk, you also need to learn to manage your trades. Trade management refers to the actions taken after the transactions have been executed – partial profits, stop loss adjustments, etc. These help to maximise your trading results and prevent winning trades from turning into losers.
Trade With Optimum Leverage
Leverage in forex helps traders increase the purchasing power of their trading capital. Forex brokers often provide high leverage of up to 1:1000, meaning that every $1 you deposit has a buying power of $1,000. To secure your trading capital, you have to trade with optimum leverage because extremely high leverage can negatively affect your trading results.
New forex traders or business owners are likely to give in to the lure of trading with excessively high leverage, leading to greater risk exposure than their capital can handle. Optimising your leverage and trading margin instils discipline by limiting your risk exposure and ensures that you take time to plan your deal and risk before trade execution.
Trade Liquid Assets
If you’re serious about preserving your capital, you should make sure that you’re trading the right forex pairs. Liquid assets are safer to trade because they have a large number of participants, and this facilitates trade execution and management. Liquidity also helps mitigate excessive volatility by reducing the frequency of random price fluctuations that occur while trading a currency pair. Major pairs are the most liquid currency pairs, while exotic pairs are less liquid and more volatile. It can be risky to engage in this highly volatile trading environment.
Trading in the financial market comes with a significant amount of risk, but following these five tips will help you to start preserving your capital today.