If you have aspirations to become a highly successful forex trader in the coming years, you obviously need to stay in the game and avoid blowing up your trading account in the meantime.
After all, if you are still trading the markets after two years but still have roughly the same amount of trading capital as you started off with, you are still in a good position to start making money in the future because you will have learned from all your mistakes and will be a lot wiser.
If you take some crazy risks with your money, however, and end up losing all of your money in one trade, or go on tilt after a losing run and end up blowing all of your money, you won’t have the luxury of being in this position (unless you are very rich and can afford to reload).
So in this article I want to discuss three ways you can ensure that you don’t destroy your trading capital:
Always Use Stop Losses
One of the main reasons why so many people end up losing all of their capital is because they simply cannot admit to being wrong. Therefore they will either remove their stop loss if a position moves against them (and hope it comes good) or not use any stop losses at all.
Either way, the results can be devastating because if a position continues to move against them, the losses can mount up really quickly until they are eventually wiped out.
So you should not only use stop losses all the time, but you should stick to these stop losses. As long as you let your winning trades run, or at least set your exit price further away than your stop loss, you should be able to make some decent returns in the long run with a solid trading method.
Keep Your Losses Small
Following on from the last point, you should never take crazy risks with your money and open positions that are excessively large. Even if you always use stop losses, it is pointless if you are risking say 50% of your money on one trade.
Most professional traders risk no more than around 2-3% of their capital per trade and still manage to make some decent profits in the long run.
Adapt To Market Conditions
Many people come up with a winning strategy and automatically assume that this strategy will keep them in profit for the rest of their life, but sadly it is not as easy as this (as I have discovered myself).
You only need to keep on eye on all of the top traders at Zulu Trade for evidence of this because many of these successful signal providers will end up blowing most of their capital at some point, after they have enjoyed a long winning run.
The fact is that market conditions change all the time. For example, they become a lot quieter over the Christmas and New Year season and during the summer, and subsequently it is a lot harder to make money at these times.
Similarly, global events can cause the currency markets to become a lot more volatile, and so you may find that your previous strategy is no longer profitable.
Therefore if you want to avoid destroying your capital, you need to adapt to market conditions if they become more (or less) volatile and either sit on the sidelines or make changes to your strategy in order to avoid incurring big losses.
Closing Comments
Forex trading is all about discipline and if you want to stay in the game so that you can potentially make some decent profits in the future, you need to protect your capital by using stop losses at all times, and avoid risking too much of your capital on any one trade.
You also need to be prepared to adjust your strategy (or adopt an entirely new one) if market conditions change because it is rare to find a trading method that is able to make consistent profits in all market conditions.
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