Your Account Size Affects Your Forex Trading
Have you ever been put off learning to trade forex because you think you might need to invest
$10, 000 before you can start trading?
One of the great advantages about trading forex yourself is that you can start with a small amount:
Open a demo account with no money at all – this allows you to start practicing once you have done a course. It’s also good to start with a demo account – and keep that demo account for later on when you want to test out trading techniques.
I personally don’t think you should spend too long on a demo account before you move to a live account.
This is because when you are trading on a demo account they give you a very nice large account to start off with and because it isn’t ‘real’ money (or your money), it does not affect you when you lose.
But when you are trading on a real account and you do lose, you feel the loss emotionally and you become more focused and put more thought and care into your trades.
Once you have learned a strategy that is working for you, you should aim to have a larger account size to trade with.
This all comes down to your risk reward ratio.
At any given time when you are trading, you should only risk a TOTAL of between 1 – 3% of your entire account’s value.
Do not risk 1 – 3% PER trade.
If you take 10 trades simultaneously and risk 3% per trade, you are risking a huge 30% of your total account! And if you lose them all, you lose 30% of your total account. Yikes! Not good.
My recommendation is erring more on the conservative side and will ensure that you keep more than you lose.
Let’s say that your account size is $100.00 total (in your live account).
1% of this = $1.00
2% of this = $2.00
3% of this = $3.00
So following my advice, you cannot risk more than $3.00 on this account at any given time.
In other words you cannot have a multitude of trades open and allow your risk to be more than 3% of your total trading account value.
Let’s say you decide on a trade that you think has high probability of being profitable, and you increase your value per pip and risk $3.00 on this one trade.
Note that this is the only trade that you CAN take as you are now risking 3% of your total trading account amount. You can only open a new trade when this one wins, loses or when you can move your stop loss to the break even point.
Alternatively, if you have a $100 account, you can still risk a maximum of 3% by taking 3 trades that each have a risk of $1.00. If you lose all three trades, you lose 3 Dollars.
Is there a downside to trading with a small account?
The answer is ”yes” – as in life there are pros and cons to everything.
Trading with a small account means there is a limited amount that you can earn, and it will take you a LONG time to grow your account.
If you are risking 1:2 (you risk one to make two; in other words you risk $1.00 to make $2.00), you are only ever going to make a couple of dollars at a time. You can’t really do much with that.
That ugly enemy called GREED will start to kick in, causing you to lose. Let me explain.
-You have been trading for a little while and have been making for example $2.00 per trade. You’re feeling good but realise that it’s taken a while to make $10.00. You want more. You think you know what you are doing so you go against all your rules and risk 10% of your account at a time, and then 15% and maybe even 30%. But the markets change: you didn’t know that NFP was happening that day and you lose. You lose a huge chunk of your money that has taken you a long time to gain. That’s an awful feeling. Never risk more than 3% if you truly want to grow your account.
Instead of risking small amounts on lots of trades to try and make money, rather have a larger account so that you can still risk between 1 – 3% of your trading account at any one time.
So if your account is $3000.00 then:
1% of your account = $30.00
2% of your account = $60.00
3% of your account = $90.00
BUT now when you win your trades and stick to your trading plan, you will win more than you lose.
By doing this you will also make more money per trade, and start to be able to earn the kind of money you need to cover your salary and do this full time.
My advice? Start off with a small account so that you can:
1. Practice your trading strategies
2. Feel what it feels like to lose – but at least you will be losing small so it won’t hurt you that much!
To open a live trading account, I do recommend FX88 and you only need $100.00 to do this.
When you feel more confident, invest more money into that account and with guidance from experienced traders and trainers, start to make the money that you deserve.
PS: If you are a forex trading newbie and would like to do an online introductory course for forex trading to go over some basics, I recommend you head over here to The Bank Trader and consider this course. It’ a great introductory course.