For any forex trader, there are many things to keep in mind in order to have a successful and sustainable trading experience. There are certain things that are just important off the bat – including picking the proper trading style and strategy in order to hit the profit targets at an acceptable rate of wins.
There are other factors that are just as important but less fancy and catchy. Things like preservation of capital. That’s right, it sounds a bit conservative and that is because it is.
Capital preservation is a conservative step that all traders ought to take in order to make sure that they can protect their equity against losses in the long run.
In this article we want to analyze the concept of capital preservation in forex and check out some of the ways that you can use in order to further protect your funds in the market.
Importance of Capital Preservation
What you need to know about preservation of capital is that it’s not merely an added step or extra layer of precaution. Taken seriously enough, it can even be a whole strategy on its own.
Of course, in this case, the strategy would be to protect and preserve your funds, so much so that it becomes just as important as making profits.
Therefore, the trader ought to air on the side of caution. This means with certain trading styles, such as scalping or day trading, the trader might experience a lesser degree of preservation for their funds as they are exposed to a higher degree of volatility and risk.
Nevertheless, there are tools and techniques that any trader can implement in order to protect their assets more.
Pick the Most Suitable Trading Strategy
Prior to even thinking about how you can protect your assets while trading, you actually need to pick a trading strategy that is most suitable for you, including your needs and skills. In this sense, a suitable trading strategy is one that can produce more profits for you than losses, i.e. a positive risk to reward ratio. Because this is the only situation where you have enough capital left to preserve.
Depending on your level of skills and experience and also the goals you have in mind, you can pick a trading strategy. That part is up to the trader. But after picking the strategy, it is crucial to fully backtest it and see how it would perform in the market.
A comprehensive and well thought out strategy is the first step to exercising the necessary caution whilst trading.
Choose the Right Forex Broker
Therefore, picking the correct broker is also very important. But the good thing is that once you can lock it down with a good broker, you no longer have to worry about this specific aspect of trading in forex.
Picking a broker can be a long and exhaustive screening process on its own. But for the sake of preservation of capital in forex, there are two factors you need to keep in mind while picking your broker.
First, you need to check out their fees and commissions related to various activities, including deposits, withdrawals, and of course trades. Some brokers offer a much more reasonable and competitive price range with regard to trade fees and transaction commissions.
Second, the regulatory aspect of the broker is crucial to the protection of your funds. If the broker is not regulated properly, then your funds are always at risk of being lost. So make sure to check the regulation of the brokers when deciding to pick one. You need to see which regulatory entity oversees the operations of the broker, such as the Financial Conduct Authority or the FCA in the UK and the Commodity Futures Trading Commission in the US.
Implementation of Risk Management Techniques
Sustaining losses is an inseparable and natural part of trading in any financial market, including the foreign exchange market. So it is only expected that you would lose some money from time to time. After all, not all trades are going to be winners.
But there is a difference between sustaining unavoidable losses as a result of market conditions that affect all traders, and losses that are merely the result of negligence.
This is where risk management comes in. With the right risk management tools and techniques, you can minimize your losses while trading.
There are different strategies and techniques that can be categorized as risk managers. For instance, stop loss orders can do a lot of good to keep your assets protected. A stop loss order can give permission to the broker to close your position when prices pass a threshold set by you.
When Trading in Forex, Use Leverage Cautiously
Leverage is basically a tool offered to traders in various financial markets, including forex, that enables them to trade with much more than their own initial equity.
One peculiarity of the forex market is that leverage rates are much higher than other markets. In fact, they can reach as high as 1:1000 which means you can trade with 1000 times more than what you bring in. For instance, you can trade $100,000 with only $100. Sounds unbelievable, right? Well, this is exactly what you need to be careful about.
Although it seems very tempting and appealing, you need to use the proper rate of leverage. Because a higher leverage could mean higher losses.
Trade the Right Foreign Currency Pairs
While many might only think about profiting and maximizing gains when choosing the currency pairs for trading, few would consider the aspect of asset conservation and sustainability.
That’s right. Currency pairs can also play an important role in the preservation of capital in forex. But how can you use this knowledge to your advantage?
In order to make sure you are trading the right pair for capital preservation, you need to trade the most liquid pairs. These would be pairs with the highest trading volume. Pairs such as EUR/USD or USD/JPY offer a much higher liquidity because more traders are trading with these pairs.
This will give you many advantages, including faster rate of trade execution. The sooner your trades are executed the more control you have over deciding on market conditions in the right time before they change.
The forex market is the most active financial market in the world with the highest daily traded volume. This means there is a higher degree of risk associated with this market as well. But there are steps and measures that you can take in order to mitigate the risks as much as possible.
Preservation of capital in forex entails a number of precautionary steps that can help your trading have a conservative outlook to them, so that you can ensure you profit as well as preserving your assets.