I often get questions from readers of my column, and I recently received one on trading Forex micro accounts that I chose for my “Question of the Week.”
Question: I have traded for quite some time and for the last six months have studied the Forex market. I plan to go live with a small amount of money ($5,000) to see how well I do. It seems that the shorter time frames (i.e. one-hour and four-hour) would suit a small account better than to trend trade and sustain the drawdowns. Do you have any suggestions on the above topics?
Answer: Thank you for your e-mail. You raised several interesting points, the first of which was account size.
My main concern is that you don’t blow up your account and lose your $5,000. Now $5,000 may not mean much to you personally, but that is not the point. Here’s what I want to see happen: I want you to survive long enough in this game that you can become a profitable, consistent trader.
Now that the new micro accounts are available, $5,000 can go a long way. Consider a trade on the EUR/USD currency pair — on a standard-sized account, the value of one pip equals $10.
This means that any series of trades that results in a loss of 500 pips will wipe out the account (500 x $10 = $5,000). In a mini account, EUR/USD has a value of $1 per pip, meaning that any series of trades that results in a loss of 5,000 pips would result in an account blow up (5,000 x $1 = $5,000).
But in the new micro accounts, the pip value of EUR/USD is only 10 cents! You would have to lose a total of 50,000 pips to result in a broken account (50,000 x .10 = $5,000).
This is similar to being able to play in a professional poker tournament, sitting at the same table as the best players in the world, without having to risk more money than you would lose in a friendly game of penny poker.
The Micro Era Begins
Micro accounts just became popular last year, and many traders aren’t even aware that they exist. This is a big deal because it means you can sustain larger drawdowns without risking large sums of money. In other words, your style of trading does not have be dictated by the size of your account.
Many traders who are undercapitalized assume that they must day trade in order to avoid large losses, but with micro accounts, traders can customize the size of the trade. For example, let’s assume that you have a $5,000 micro account and you are trading EUR/USD (one pip = 10 cents).
Quiz time: Which of the following trades creates the greatest amount of risk?
1) Risking 1,000 pips on a one-lot position trade (10 cents x 1000 = $100)
2) Risking 100 pips on a 10-lot swing trade (10 cents x 10 lots = $1; $1 x 100 pips = $100)
3) Risking 10 pips on a 100-lot day trade (10 cents x 100 lots = $10; $10 x 10 pips = $100)
Of course, the answer is that the risk of $100 is the same on all three.
The big idea here is that you could be a day trader, a position trader or a swing trader. In fact, you could do all three at once– in a $5,000 micro account. Your style of trading need not be dictated by the size of your account.
Good luck!
Ed Ponsi is a Forex and equities instructor for the Online Trading Academy.His name is a globally recognized as a lecturer and teacher, and he is the former Chief Trading Instructor for Forex Capital Markets. To learn more about him, read his bio.
This article originally appeared on The Options Insider Web site.
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