Forex: Determining How Much Money You Should Risk At The Beginning

The total amount of money that the trader has in his disposal goes on to determine his chances at the trade in a major way. In fact, even a slight edge in the capital can result in to great returns for him.

Traders are often guided by the belief that small investments can guarantee them big very big returns- which rarely happens. Traders with small investments are often tempted to explore a large amount of leverage or take huge risks to build on their account very quickly. Hardly do they realize that the fund managers themselves end up making less than 10 to 15% a year and as such traders with small amounts cannot practically expect to secure double or triple of their investments. The exposure to the higher effective leverage is practically a result of sheer inexperience of traders.

The leverage increase can actually magnify losses in the account. As a result, disappointed traders either give up trading totally or choose to compound the results of trading with high leverage. In order to avoid these mistakes, its only prudent for you to learn about the factors that determine the amount of money you should start trading with.

How much money should you start with?

One of the first lessons in forex trading is that you should not risk more than 1-2% of your trading account on a particular trade. The trading capital and the size of the stop loss on the trade determine how much money you can trade with. Irrespective of what the trader’s trading capital is, the size of his position will be governed by the size of his stop loss. The larger is your stop loss, the greater will you have to reduce your position size in order to ensure that you stay within acceptable limits of money management.

The 3 types of position sizes available for you are:

• Mini Lot
• Standard Lot
• Micro Lot

Each one of these aforementioned position sizes requires different trading amounts, based on the size of stop loss.

The mini lot is offered to traders who do not have as high a trading account as would be required to open a standard lot. This lot is equal to 10,000 units of base currency with each trade having a value of $1 per pip. Standard lot, on the other hand, is 100,000 units of base currency. A micro lot equates a thousand units of base currency with a value of $0.10 per pip.

The Total Cost

Please do not forget that the overall cost of trading includes various other fees and commissions besides the money you are risking. Other costs include:

1. Optional costs which you have to pay for the services you might want to avail like- custom technical analysis services, daily forex news etc
2. Commissions for brokers on each of the trade placed: It varies from broker to broker but is a tiny amount.
3. Spread: It is the difference between the buy and the sell price of the currency pair and it depends primarily on market volatility.

It is important to take note that while smaller accounts are largely impacted by the commissions and other fees, mentioned above, unlike a larger account.