6 Strategies To Protect Your Trading Capital

September 13, 2023


New traders often focus solely on making a profit. If you think of trading as a quick way to make money, you will end up making poor decisions that don’t benefit you in the long run. Think of trading as a slow and steady way to see profits over time.

This post will cover some of the best strategies to protect your trading capital. It is possible to make wise investments even if you aren’t able to make a large investment right at the beginning of your trading journey. 

Black Eagle Financial Group is a proprietary trading firm with the goal of taking your trading to the next level with several routing options and a mentorship program.

1. Stick With the One Percent Rule

When it comes to investing, there is no hard and fast rule for how much money you need in order to start trading. Many traders choose to invest no more than one percent of their trading capital in each trade. It’s a great way to keep your position in the market if you end up losing money on a trade.

2. Diversify Your Portfolio

Holding only one position could cause a huge loss if the market crashes. Diversifying by holding both long and short trades across different market sectors can help reduce risk. 

When the market crashed in 2015, traders holding long positions lost great amounts of trading capital. Those holding both long and short positions were able to maintain a more balanced portfolio.

Some traders take a different stance entirely and only hold short or long positions at a given time. This strategy works for people with detailed knowledge of their trades and their history of predictability. Focusing on stable trades in certain sectors can work to help some traders with mitigating risk. 

3. Always Use a Stop-Loss Order 

A stop-loss order is one of the best trading strategies to protect your trading capital. It helps you manage your potential risk by designating a specific time to trade when the market drops. A broker will sell a certain stock when it drops below the designated amount.

For example, if you purchase a stock at $10 per share, you can enter a stop-loss order for $8. Your broker will sell if the stock falls below $8, limiting your loss.

Benefits of Stop-Loss Orders in Trading

A stop-loss order acts as an insurance policy for your stocks. There is no cost for implementing one, and you only pay a broker fee if they end up selling the stock. A stop-loss order gives you the freedom to focus on other things without constantly monitoring your stocks.

Another benefit is that a stop-loss order prevents you from losing money by holding onto a stock if you feel a personal connection. It may sound far-fetched, but many traders hold onto their favorite stocks in hopes of them regaining their position in the market and end up losing money in the long run.

Before you decide to implement stop-loss orders, take the time to gain a clear understanding of the kind of investment strategy that works for you. If you’re an investor who prefers to hold into stocks as the market fluctuates, you won’t benefit from a stop-loss order. 

No matter your strategy, a stop-loss order won’t guarantee a profit. That’s up to you and your own investment choices. 

How Do You Determine Where to Place a Stop-Loss Order?

If you’re new to trading and to stop-loss orders, placing them can be hit-or-miss at first. There are four key components to watch in order to determine where to place a stop-loss order.

First, check the lowest point of the previous day. That’s a good starting point.

Next, check the overall market structure for fluctuations. Note the support zone of your stock and place your stop-loss just below that level. That way, you can sell if the stock falls below the predicted lowest level.

The third thing to look at is the Average True Range, or ATR, below the most recent support zone. An ATR is the measure of volatility over 14 periods. Place your stop loss one ATR below the recent support zone.

The percentage method is the fourth way to determine where to place your stop-loss order. For this method, think about the percentage of money you are prepared to lose if you sell. If you are comfortable with your stock losing 10% but no more, place your stop-loss below that.

4. Use a Buy Stop Order to Enter the Market

A buy stop order allows you to buy a stock when it falls below a certain price point. Like with a stop-loss order, you don’t have to continually monitor your desired stock. If it drops to your designated price, you can automatically invest, and if the price increases, the buy stop order will automatically stop the buying process, keeping you from investing more money than you want.

5. Assess the Risk of Every Trade

With every trade comes the risk of both profit and loss. Instead of acting on impulse, take the time to gauge the potential risk of each stock. Stocks with more potential to earn a profit are a wise investment, and stocks with a volatile history are more of a risk.

Risking the same amount of capital on every trade will help protect your account. Since you never truly know which trades will see a profit, investing the same amount across the board is smart money management.

6. Utilize Backtesting

Backtesting uses historical data to simulate how well a strategy will perform. It’s a great way for new traders to fine-tune their investment skills and learn which strategies work the best. When you utilize backtesting, you work under the assumption that if your chosen strategy works with historical data, it will also work for future trades.

Automated software programs run the historical data and provide you with a projected result. If backtesting is unsuccessful, you can adjust the strategy and try again to see a better result.

The main advantage of backtesting is that since it is a hypothetical test, you don’t lose capital during the process.

Take Your Trading Game to the Next Level

When it comes to protecting your trading capital, there is no one-size-fits-all approach. Strategies that work for someone else may not work for you. No matter what strategies you choose to implement, consistency is key.  

Decide how you want to approach trading and implement long-term strategies to improve your profits over time.

Black Eagle Financial Group is a proprietary trading firm with competitive pricing and leading trading platforms to fully customize your trading experience. There is no minimum capital requirement, and you can start trading in real-time right from the start.

When you’re ready to level up your trading, fill out our contact form or call toll-free 1-833-BL-EAGLE (253-2453). Protect your trading capital with our help.

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