One area of forex that is rarely discussed, despite how important it is, is the capital that any investor requires if they want to enter the market. Without capital, you have nothing to invest and therefore it is unthinkable to foray into the forex market.
Even once you do have capital though, there is more involved with managing capital than most people ever think about. For one thing, no matter how much capital you have, you need to know how to make that capital work for you – else it will just go to waste.
End of the day, this boils down to a question of knowledge: How much do you really know about the forex market? Do you know the different types of trades that can be accomplished? Do you know how to place limits and stop orders? Do you know what types of trades are most profitable?
And most importantly: Do you know how to cut your losses when you should?
All of these questions must be answered affirmatively before you can actually delve into the forex market with your capital. Without the necessary knowledge of the ins and outs of the market, you’re going to be essentially going into it blind, and that is a surefire recipe for disaster.
Mind you, even once you have sufficient knowledge to go into the forex market, there is more that you need to think about. For starters, all the knowledge in the world can’t save you from unexplainable fluctuations that sometimes take place.
By nature, the forex market is partly predictable. But at the same time, it is also partly unpredictable and no matter how savvy an investor you are, eventually you’re going to come up against a situation that you really couldn’t predict at all.
When that happens, knowing that you should cut your losses is key, but more importantly, managing your capital from the get go so that a single freak incident does not cripple your investments is just as important.
Imagine if you were to invest all your capital into a single trade that went bad. Even if you managed to sell before things really hit rock bottom, you’d find that you’ve lost a large percentage of your capital.
Whereas if you’d managed your capital effectively and only invested a small portion of it, you’d have lost a lot less.
Naturally the common argument against this is that by investing less you’re reducing your potential for profit. Certainly, this is true, but at the same time putting all your eggs into one basket, no matter how attractive-sounding it might be, is never a good idea.
Remember: Your capital is your lifeline, and you should strive to manage it as effectively as possible. Split it into small groups and invest carefully. Once you get the hang of it, you can start investing larger groups.
By wisely managing your capital in the forex market, you stand to gain a lot, with greatly reduced risk.