As a forex trader, you are the guardian of your capital. For most retail investors (that’s ordinary folks that aren’t bankers), there are investment funds suggested by banks, accountants and financial advisors that promise to look after your capital for you, sometimes even with guaranteed rates of return, and the refusal to choose these products essentially assumes they can do better managing their own money. This theoretically makes traders more committed and more careful over their investments in the market – true profit in trading only comes beyond the point at which there additional capital returns above and beyond the best percentage offer on the market. In order to achieve this feat, the ordinary forex traders needs to make sure he can deliver a return and build his capital pot, which sounds much easier than it is in practice. As much as this is an issue of growth and finding the right positions, it is also defence-critical, and the need to manage and maintain your capital is a paramount concern.
When you run a business, you might have premises, equipment, stock, vehicles – any number of assets that are used to deliver value to your business. As a trader, your assets are more simplistic – your trading capital. Just like the business couldn’t function without its capital, you couldn’t function without yours. Capital is the lifeblood of forex trading, as with any type of investment, and any damage to it is worth way more than you might at first expect by the time you factor in loss in future earnings potential.
At the same time, an overly cautious approach will get you nowhere. The reason you’re investing your money in forex trading is because you want to make more of it, and if you never took on any of the risk, you’d never reap any of the rewards. The trick is, of course, to find a balance between the two competing pressures, in order to ensure you’re safeguarding as much of your capital as you can while also giving yourself the best chance of making a healthy return.
Knowing the right balance for your portfolio is something you can only really gauge with time and experience. Ultimately, it comes down to the level of returns you are looking for and the timeframe over which you want to generate those returns. Greater returns over a shorter period will always be more risky, whereas longer term, shallower returns will be less so.
Remember that you don’t always have to invest in massive positions to get to where you want to be. The magic of compounding returns means that with a small percentage daily return, you can have hundreds of percent growth annually – try beating that on the high street. In the interests of protecting your capital, trade modestly but don’t shy away if an opportunity comes calling. Saving your resources for future trades is not only prudent but common sense – otherwise, you’ll have a very short lifespan as a forex trader.