Forex Trading: Capital “Close” vs. Large Capital
I am sure you agree that capital is one of the main factors in trading.Even in trading known as 3M: Mind, Method, Money , as the “three main pillars” in trading, including forex trading.
The title of this article explicitly compares capital “tight” or limited with large capital. It should be emphasized here that when talking about capital it is not always talking about – even though it will be related later – the nominal amount of money we have. We will not talk about “capital strength” here, because – believe me – we also understand that small is not necessarily weak, big is not necessarily strong. All depends on capital management. That it is not certain that small capital will fail and large capital will succeed, we also understand 110%.
What we will discuss this time is more to “freedom” to implement the strategy. Recognized or not, the amount of capital will also determine the strategies that can be applied in our trading activities.
I always like to use the “military” analogy. Imagine that you are a soldier sent to the front line, but you are only provided with a M1 Garand rifle and eight bullets. Of course you have to save your bullets and really choose valuable targets. You cannot freely choose a target, because every bullet is very valuable.
In forex trading , capital is like ammunition owned by a soldier. When your capital is limited, you will be “forced” to be more careful about using your capital.
You must be more “picky” in making transactions.
I recently tested a trading system with funds (REAL) which was deliberately limited. Accidentally using a real account because it is liked or not, “sensation” in the real account is different from the demo account. By using a real account , our money is “at stake” so that decision making should go through the right process.
Finally, even though until now it has managed to make a profit, we feel that it is true that there is no flexibility in implementing a trading strategy compared to accounts that have more loose capital. The benefits obtained are not optimal because not every opportunity can be used properly. Never even made transactions for days. Not because there is no opportunity, but because the risk (stop loss) is technically unable to be anticipated with capital management that has been arranged in the trading plan .
For simplicity: the account has less capital, so based on position sizing rules, I am not allowed to open a position to take the opportunity, because the risk exceeds my risk tolerance.
Another example of a recent case is, when there are opportunities that are equally good in several currency pairs at the same time, at the same time, the capital owned is very small. It is not enough to open a position on all of these pairs at the same time when referring to the trading plan.The capital is “tight”. Finally, I was “forced” to choose one pair that I consider to have the greatest potential to make profit.
But what happened? My choice turned out to be “wrong” (in quotation marks, because the process that was passed was actually correct, so that even if the loss was not too much of a problem), because I actually experienced loss . While if I open a position on another currency pair , it should benefit.
It was then realized that if the capital owned was at least twice as much, then at least I could have opened two positions on two different pairs without worrying about overtrade because everything was taken into account in the trading plan .
It’s About Strategic Discretion
Don’t misunderstand. Well, I repeat my statement that this time we are not talking about “capital strength”. Again, this is about “strategic freedom” .
I agree that the amount of capital owned is not a determinant of one’s success in forex trading . The determinant is the ability to implement 3M which we alluded to at the beginning of this paper. There is no denial for that.
But based on experience, related to strategy, if I had more capital, at least double that, I would be able to open positions in other currency pairs that also created opportunities.
I will also be able to take more opportunities without being hit by super-saving position sizing .
I will not worry about experiencing too large losses, because the number of lots that I will take will also be adjusted to risk tolerance according to my trading plan . Thus, the potential to increase profits will be more open.