Risk capital may sound like something that’s probably more complex than it sounds (such as risk management), but it isn’t. In fact, it’s just a term used for the amount of money you can afford to lose – this is the only money you should use for something as risky as trading.
Basically, you need to work out if you can actually afford to trade. Risk capital is money that, in the event that you lost it, you wouldn’t lose out on anything vital. It should be money that could otherwise be put aside for luxuries, as if you lose more than you can afford, it could affect your personal and professional life in a very negative way. This would make it highly unlikely you will return to trading, and all this hard work will have been for nothing.
Also, if you are risking money that you need for paying the bills, it will negatively impact on your ability to make trading decisions from an objective viewpoint, and make trading a very stressful experience. Just imagine if you had a trade open in the knowledge that if you get stopped out, you won’t be able to make your mortgage payment this month – how stressful would that trade then be?
Also, if you lose money that you can’t afford to, then you’ll probably have to borrow money in order to cover your losses. Interest on these loans would end up making your loss much bigger. For this reason, you can’t calculate risk and reward accurately unless you are trading with risk capital.
So, unless you have a pile of money sitting there that you’re not too bothered about losing, you should only consider trading forex in demo mode. This will have the added bonus of making you better prepared as a trader for when you can afford some risk capital – and also makes it less likely that you will lose it.
Another thing you should consider when creating a trading plan is your time availability. You need to ask yourself in all honesty how much time per day,week, or month you are prepared to commit to.
That’s not to say that if you can’t make a daily or even weekly commitment to it you can’t succeed as a forex trader. It just means that you’re going to have to use an appropriate trading style.
If you want to trade short time-frames, then you’ll need to spend longer in front of the charts. This means that if you are entering and exiting trades throughout the day, you would need to be in front of the trading platform the whole time in order to avoid getting caught out or missing opportunities.
If, however, you are trading longer time frames, you don’t have to spend as much time watching the market. All you need to do is check your trade from time to time.
When deciding how much time you can commit to trading, you need to be realistic, and take distractions into account. For example, if you think you can trade for 8 hours every day, does that mean 8 hours of concentrated effort poring over charts and economic data, or does it mean 8 hours of analysing data releases and charts while you look after your children, do the housework, or catch up with your correspondence?
With a trading style based around winning quick, short term profits such as scalping, you need to be glued to the screen for the whole trading day, or you’ll miss many of the best opportunities. .
And, as well as watching the charts, you need to spend time developing and tweaking your trading system. To trade your system, you will need to start at charts for extended periods looking for possible entries, and once you are in the trade, you’ll have to manage it.
Then, when you exit the trade, you will need to take the time to review your trade and see how you might have improved on it, and write everything down in your trading journal. The amount of time that you will need to achieve all this depends very much on your trading system. And if you are trading more than one system at once, you will be repeating this process for every system that you want to trade.
So, it’s more important to be realistic about the time you can commit to – and do so consistently – and design your trading plan around that. Otherwise, you’ll find yourself falling behind, and your trading plan just won’t work if you don’t put in the hours that it requires.