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CO01 - What Is Your Risk Capital? How Much Money Can You Afford To Lose?

"Risk capital is something that you will often hear when it comes to the financial markets. No matter whether you are trading stocks or some kind of derivatives including forex, risk capital is an important topic of discussion. Simply put, this is the amount of money that you are using to trade. As you might already know, trading with money in risky markets means that you need to play it smart. Imagine if you took a loan from your bank to bet on forex and if you lost. You would end up holding the bag literally. While forex trading is often associated with riches and a luxury lifestyle, the truth is far from it. Risk capital should ideally be the capital that you are willing to risk, or in other words lose it all. While the markets will reward you if you are good trader, always remember that the capital with this you are trading is a risk capital. Learn more about risk capital and simple tips to help you to trade smart."

Trading the financial markets, regardless of the type of markets can be risky. With forex trading, the risk is even more higher. This is partly due to the fact that forex trading is leveraged.

By leveraged, we mean that a trader borrows funds from their broker in order to increase the number of contracts that they can trade. This is done in order that the forex trader can make some decent and meaningful profits.

It is possible to trade without leverage. But the downside of this being that traders will need to have a huge upfront capital to trade. This would be at least $100,000 to begin with, if you do not want to trade on leverage.

Therefore, many traders tend to choose trading on leverage as it allows them to maximize their profits without the need to put up the capital themselves. On the downside, this allows traders to take on more risk.

When you trade on leverage, both your profits and your losses are greatly maximized. This risks not just your trading capital but even more. You could potentially end up owing money to your broker.

When you trade forex, chances are that you might have heard about risk capital. The term might seem fancy, but it simply means the amount of capital that you are using to trade. Because forex trading is risky, the term risk capital simply means the capital that you are risking to trade.

There is a subtle difference between risk capital and the amount of risk that you put on, on a trade. Risk capital basically takes into account the entire money that you have on your trading account. This is regardless of whether you have open trades or not.

The term risk capital is used because this is the capital that you are risking in order to make money by trading currencies or commodities.

You might have come across disclaimers about how risky forex trading is. These disclaimers are required by government regulation and forex brokers need to clearly inform their customers about the risk.

Below is a quick list of things that you should never do when trading forex:

  1. Never trade with money that you cannot afford to lose. This includes your savings, pension funds or just about any money that you are saving up towards something
  2. Always trade with money that you can afford to lose. This might mean having to build up an initial bankroll to fund your forex trading account. When you trade with the risk capital, the losses should not affect you financially
  3. Never trade with borrowed money. This means, using credit cards or trading with your mortgage money or some other loan that you take. While forex trading can be very lucrative, it is equally risky. There is a very high chance that you will lose money and this could potentially lead you into debt.
  4. Never trade with high leverage. Until a certain point in time, forex brokers used to offer leverage of as high as 1:1000. However, as more and more forex regulators clamped down, leverage offered by forex brokers has come down. Still, even using a 1:100 leverage is considered high by some counts. Never become too over leveraged as it can lead to potential losses at some point
  5. Always stay disciplined when it comes to trading. Most of the times, you will have to sit on the sidelines and wait for the correct set up to occur. This requires a lot of patience and discipline on your part. Therefore, it is essential that you remain in control at all times. Once your emotions get into the decision making, you can start to make potential losses

Besides the above, traders also need to have realistic expectations. If you turn to forex trading because of chasing the dream of making 30% returns a year, then you can expect to lose money even before you will make any profits.

Having the right expectations plays a big role in your journey as a successful forex trader. Therefore, keep your expectations about the markets in check and aim for a more achievable and realistic goals. Many traders lose money due to the simple fact that they do not pay much attention to the risks. They tend to chase profits which leads to big losses over a period of time.

In conclusion, always remember that trading, be it forex or any other derivative product is risky by nature. Therefore you should only risk the amount that you can afford to lose.

Read 827 times Last modified on Thursday, 04 July 2019 09:47