Revealing safe ways to manage forex capital

Forex capital in foreign exchange trading has many options to build effective strategies. In this article,Learn Forex Trading will guide you to become aware of the importance of capital management, providing information on effective capital management methods. Please join us to discover optimal capital management strategies!

What is Forex capital?

Forex capital is synonymous with careful control of the investment process and is a popular term in the financial sector, especially learn about Forex trading. 

There are many approaches to the concept of capital management. In a financial perspective, capital management is about maintaining accounts without major failures, while ensuring profits.

The effectiveness of capital management is shown when investors use capital appropriately to optimize profits over the long term. Typically, investor failure often comes from unwise capital allocation and management. 

When experiencing failure in a trade, investors often make the mistake of making the next trade without properly assessing the risk. This leads to heavier losses.

See more: Where is the best acquire Forex knowledge?

Why is it necessary to manage capital in Forex trading?

When you are looking for advice in the field of trading, any financial expert will advise you to master capital management skills to ensure high performance. Why is that? Here’s why:

• Staying afloat: One investor’s profits often mean another’s risk. This makes Forex capital a decisive factor in maintaining financial trading activity over the long term.
• Maintain your mentality: Effective capital management helps investors determine the level of risk, profit, and ability to accept losses. This helps maintain a strong mentality, not being strongly affected when faced with failure.
• Recover quickly after losses: In forex trading, losses are inevitable. However, with strict capital management, investors can quickly recover lost money. Capital management of 2% per trade helps keep 80% of capital after 10 orders, minimizing risk.
• Achieve optimal profits: Financial trading, especially on the forex exchange, is a game of probability. Effective capital management allows investors to calculate maximum profits and minimum risks in case of mistakes.

In general, capital management skills on the forex exchange are not just a support tool. It is the key to success in the complex world of financial trading.

Forex capital rules

Although Forex capital seems simple, not everyone does it correctly and accurately. Therefore, when participating in trading, investors need to comply with the following specific rules:

• Always place stop loss orders: No one can completely predict the direction of the market on the forex exchange. A small change can lead to a loss. Therefore, placing stop-loss orders is important to control risk.
• Don’t expect too high: There are successful people. They often have sharp thinking and extensive experience. Newcomers should start with small transactions. To learn how to adapt and gain experience.
• Set a clear plan before each transaction: Investors need to make a capital management plan. Determine the expected profit level and acceptable risk level.
• Patience: Seize opportunities, maintain patience, and stick to the plan. This can help traders manage capital effectively.
• Be careful with forex leverage: Using the right level of leverage is important. You should not exceed 7 times your account and always consider the level of risk.
• Determine your funding sources: Never use more than 15% of your savings account. Never use more than 3% of your trading capital in one day.

  

Ways to manage capital in Forex

 In the field of forex trading, there are all kinds of different Forex capital methods. For optimal performance, investors need to choose a method that suits their personal trading style.

How to manage capital in Forex according to price average

This method separates the invested capital into small parts and uses them to participate in the forex exchange at different times. Specifically, if the first order is profitable, investors can consider increasing the capital for the next order.

Advantage:

• The loss ratio is reduced because the amount of money input for each order is not large. When the first order is profitable, investors can increase capital for the next order.
• For trend-following investors, this method can increase account value. Especially, in a prolonged trend, profits can reach high levels.

Defect:

• Difficulty in determining a reasonable entry point for the next order.
• The risk of loss increases rapidly if the market reverses.

Forex capital management based on cost average (loss tolerance)

In a situation where you execute a buy order and the price falls, although you record a loss, however, hesitant that the price will recover, you decide to add a buy order at a lower price. This action may repeat as prices continue to fall. 

If the price eventually increases, you can achieve significant profits on the forex exchange. Similarly, with sell orders, you can follow the same strategy.

Advantage:

• Chance to win big when taking advantage of short-term swings when the price moves in the expected direction.
• Profits can be achieved as soon as the price reverses, without needing to return to the starting point.

Defect:

• Managing psychology in forex trading becomes difficult, making it easy to open orders at will and deviate from the original plan.
• This method is not suitable for new traders or those who lack discipline, it can have a negative impact when investing.

Fibonacci capital management on the Forex platform

The method of placing orders according to the Fibonacci sequence is a strategy where if the first order fails, the investor will continue to place subsequent orders according to the rules of the Fibonacci sequence. In this way, the series of losing orders will gradually increase in size and the investment amount required in each trade increases with each step.

Advantage:

• Creates stable growth and can rely on the rules of the Fibonacci sequence.
• Increases positive psychology in trading, because the next order has a higher value than the previous one.

Defect:

• Increases risk if the price does not move in the expected direction, which can lead to large losses.
• Requires a complex understanding of using the Fibonacci indicator, making this approach unsuitable for investors unfamiliar with the tool.

Capital management method in Forex trading Victor

 The double exponential Forex capital method is a strategy where if the investor wins, they keep the same trading volume; Conversely, if the first order loses, the trading volume of the next order will increase by 1 unit. 

The goal is not only to recover the lost money but also to achieve profit. If the second order wins, the trading volume of the third order will return to the same as the first order, and the process repeats.

Advantage:

• Just one winning order can cover the most recent loss.
• Increasing arithmetic progressions reduce risk.

Defect:

• Requires a large amount of capital to maintain trading, especially when the losing streak is long.
• The risk of burning your account increases if you continuously encounter losing orders.

See more: Opening and verifying an ICMarkets account

How to manage capital in Forex according to Martingale

After encountering a losing order, the investor doubles the trading volume. If the price moves in the predicted direction, the investor can recover the previous loss. At the same time gain the remaining profit. In case the second order fails, the investor continues to double the trading volume until profitable.

Advantage:

• One profitable order can resolve all previous losing orders.

Defect:

• Requires a large account to maintain consecutive orders, especially in the case of long-term trading.
• This method is not suitable for new investors and those who tend to “retaliate” against the market, due to the possibility of making trading decisions without careful consideration.

  

How to manage capital in Forex Kelly

The mathematical formula was created by John Kelly (December 26, 1923) originally to solve the problem of signal interference in telephones. But later it was widely applied in betting games. Especially horse racing, and also in the investment field.

Kelly formula, applied by investors. Helps determine what percentage of capital should be placed in each trade to achieve maximum profits in the long run.  This formula is expressed as follows: Kelly % = W – [(1 – W) / R]. Where W is the win rate on total transactions. R is the ratio (reward):(risk).

Advantage:

• Trading volume is optimized at a moderate level. Avoid placing too little or too much capital.
• Based on mathematics. Helps adjust trading volume appropriately.

Defect:

• Risks still exist, especially when using large amounts of capital.

Conclude

Above is a summary of all the instructions on Forex capital, to help investors achieve high performance. Capital management brings many important benefits to investors, and choosing the appropriate method should reflect the specific market situation. 

In addition, you can also refer to Forex books that we have analyzed in detail. Hopefully, these shares from Learn Forex Trading will help traders succeed when participating in the foreign exchange market.

Questions related to Forex Capital

Why is capital management important in Forex trading?

Forex capital is the factor that determines profits and protects investors’ accounts. It helps control risks, enhance trading psychology, and maintain survival in the market.

Which capital management method is described by the Kelly formula?

The Kelly formula helps investors determine what percentage of capital should be placed in each trade to achieve maximum profits. The formula is: Kelly % = W – [(1 – W) / R], where W is the win rate and R is the Reward: Risk ratio.

Why is the Fibonacci sequence order placement method used by investors?

This method takes advantage of the rules of the Fibonacci sequence to determine trading volume, helping investors optimize profits and reduce risks.