Our approach to trading is based on the management of risk. If you have an amount of money you want to use for Forex trading, say $ 10 000, it would be prudent not to have this entire amount in 1 account. You should only be exposing your trades to between 5% and 10% of total money.
If we were to expose our trading to 10% of our total money we would create 2 accounts:
- A Capital account with $ 9000
- A Trading account with $ 1000
The capital account is the part of your capital you do not want to expose to risk while trading. You would therefore have a separate account where you keep the 90% of your capital in an account that is not exposed to trading risk.
This account could be another account with the same broker or an interest bearing account with a financial institution.
The main objective of this separate account is to firstly safe guard you money and secondly have some where to transfer your gains to or to top up your loss from.
The whole idea is to use the following process (which will become clearer as we go on):
1. When you double the amount in your trading account (the one with say 10% of your money) you would transfer the gains to your capital account.
2. When your trading account losses cause that account’s balance to drop to below 20% of the original balance you would top your trading account up from your capital account.
This approach of not having all your eggs in one basket is a risk management technique that has been very important to Prof FX over the years.
Some traders just mentally split their money into a capital and a trading portion of their trading account, but the physical splitting of these amounts is part of the trading psychology and discipline adopted by Prof FX.
This becomes even more important when the money that you use to trade is over $100 000. If you can not arrange this with your Broker you will have to apply strict mental discipline and separate these balances mentally in your one account.
You will also see later on that splitting of the account into a daily risk balance and a safe amount also allows us to trade very aggressively using the smaller amount.