As a forex trader, you should know how to protect your trading account balance as it is a vital part of forex money management. It is a concept that protects your trading capital from losing trades. This lesson will demonstrate the way of protecting your trading account balance from being lost.
09 March, 2020, | AtoZ Markets – In forex trading, money management or risk management is a core concept that you should start as soon as you begin to learn to trade. Therefore, it should be your core focus throughout the trading career. It will let you fight with performance downturns and will keep your trading account safe during adverse times.
The primary step to protect your trading account balance is that you should only take a risk on a small portion of your money that will not make you tense in case of loss.
Many professional traders do not take more than 1% to 2% risks per trade. The reason behind this is limiting your risk per trade will reduce the effect of losing streaks. Before taking action you need to know some core functions of the forex market.
Why Do You Need to Protect Your Account Balance?
You need to understand that all your investment in the forex market is at risk. Before proceeding to how you can protect your trading account balance, we need to know “Why”-
#1 Understand the Leverage of Forex Market
Forex trading means you are trading in very huge and the world’s biggest financial market. Therefore, to enter the market it requires an amount of investment that is often not possible to manage by retail traders. Therefore, forex brokers provide leverage to their clients so that they can trade with smaller amounts.
The leverage means the broker will lend you extra money to take more significant risks. For example, you should invest a minimum of $10,000 to buy one standard lot of EURUSD. However, you can buy one standard lot of EURUSD at $1000 only if your broker provides you 1:10 leverage. The 1:10 leverage means your investment is acting like 10X higher of your original investment, and that’s how risks come.
The increase of leverage will increase the possibility of making your investment zero.
You should keep in mind that you are trading with your investment with the leverage that is provided by the broker. Therefore, make sure to use appropriate risk and reward. As a forex trader, you are here to make money not to lose all of your investment.
#2 Your Stop Loss might Not Work
Have you ever read your broker’s terms and conditions? It says something like this:
A regular stop-loss does not eliminate trading risk. When the price reaches your stop loss, your order is closed. In the case of slippage and price gaps, the price level of your stop-loss can be substantially worse than the actual stop-loss order.
What does it mean by the under ‘normal’ circumstances?
Your stop-loss order will work just fine. However, due to fundamental news, it may hit the stop- loss due to a price gap. Therefore, your broker cannot assure you that your fund will be safe. For a few traders, their account stability turned poor in which they should deposit additional funds to reduce their losses.
Some brokers offer a guarantee to prevent stop- losses wherein they’ll usually execute your order at the price you set it to. One such broker is the IG Group, which got insolvent during the CHF crash in 2015.
#3 Understand the Segregated Trading Account
Segregation of funds means that brokers protect your investment. They keep clients’ funds separate from their funds. Therefore, in case of insolvency, or bankruptcy, the clients’ funds remain safe. However, it will not provide a guarantee that your investment is 100% secured. Different brokers offer different security levels of recovery amounts.
Therefore, before investing in a broker, you should check what they offer regarding segregated accounts.
How can You Protect Your Trading Account Balance?
If you read the above section, you probably know that the safety of your fund is in your hands mostly. You might have a good relationship with your broker’s manager, but they will barely take responsibility for your fund. So what you should do now?
#1 Invest Wisely
The forex market is a risky market for retail traders. Therefore, you should know that all your investment is at risk. It is not wise to sell your property or collect money from your credit card and invest in a forex market.
You should invest the money that you are ready to lose. What does it mean? It is not like a charity function. Investing in the forex market will put you extra pressure on your mind. Therefore, it is likely that you will make wrong trading decisions.
Moreover, there is a risk that you may lose more money to recover previous losses. This is how you can lose all of your investments. So make sure to invest the money that will not give you extra pressure on making decisions.
#2 Use an Appropriate Risk: Reward
It is a vital part of the forex money management system. In a single trade, you should take the risk of an amount that is lower than the reward. The standard ratio for risk: reward is 1:2. However, this standard can differ from the trading style, depending on the accuracy of the analysis.
If you use a wrong risk: reward for a trade you may lose your equity gradually. It is not wise to take the risk of $100 with a reward of $20. So before applying your strategy in the real market, make sure to check the risk: reward; otherwise, you may fail to protect your trading account balance.
#3 Make Regular Withdraw
It is not like that your broker will take you all investment into their pocket. Their earning comes from your spread. However, there is some uncertainty in the forex market. In case of the uncertainty, your broker may fail to give protection of your trading account balances as you have seen in the CHF crash in 2015. Making a regular withdraw will provide you with extra security for your investment.
On the other hand, making withdraw will decrease your profit percentage, as you cannot increase the lot size with small deposits. Therefore, you should maintain a balance between the withdraw and the current required investment.
#4 Choose a Regulated Broker
This is probably the most crucial part. A well- regulating authority will not allow a broker to provide high leverage in their trading account. Therefore, with smaller leverage, you can trade with smaller risks, and therefore you will get smaller benefits. The critical part of a regulated broker is that it provides negative balance protection. For example, CySEC regulation provides safety of up to 20,00 euros for retail traders. So if you are a citizen of any European Union country, you can avail 20,000 worth of insurance from CySEC in case your broker failed to pay back your deposit.
After the above discussion, we can come to the conclusion that the capacity to ensure maximum security of your trading account balance in on your hand. In summary, you should follow these steps:
- Money management is a vital skill a trader should learn.
- By using an appropriate money management system, you can protect your trading account balance in the event of a performance downturn.
- You should not risk more than 1% to 2% of your account balance on a single trade.
- If you lose 1% of your trading balance per trade, you should have 20 losing trades in a row to lose only 20% of your account.
- The minimum risk: reward you should stick is at least 1:2, and you can focus on having a risk to reward ratio of 1:3.
After all, a well-regulated forex broker is the key. You should have some knowledge about forex regulations, including how it works to know about the safety of your fund.
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