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Throughout the Forex worldwide, brokers offer many different leverage setups and account types and there are many factors to consider when opening a trading account. Factors such as the style of trading that you will be using, your appetite for risk and the amount of investment capital that you have available, are all things to consider when opening a Forex trading account. So I want to take a moment to give you some food for thought when it comes to your trading account.
First, proper account capitalization can be defined as having a sufficiently funded trading account to place and hold trades and manage risk. For example, if you only have a small amount of risk capital available you should consider opening an account that gives you better flexibility with your lot allocation for each trade, like a mini or micro account.
Also, by having a properly funded trading account it increases your chances of recovery after a period of drawdown. With an insufficiently funded account, it will become much more difficult to recover losses when they happen. Of course, it is unrealistic to believe that you will never have a loss; the key is how you manage those losses.
In addition to proper account capitalization you should develop leverage and risk guidelines.
First let’s talk about leverage, leverage allows a trader to control a large amount of currency volume in a trade without being required to fund the full amount of the trade. Of course it is important for us to recognize that recent regulations for U.S. brokers limit leverage to 50:1but there are still different leverage choices for non-US brokers.
Now, the dollar amount required from the trader to open a trade depends on the leverage level set up with your broker. The higher the leverage level the smaller amount required from the trader. Leverage increases the trader’s ability to control a higher amount of volume in the market with only a small investment. But keep in mind that the higher the leverage level the larger the potential risk to your trading account.
Now, just because you can control this massive amount of volume using leverage, it doesn’t mean that you should ever expose your margin account to the maximum risk…….overloading your account to the maximum lots increases the chances of wiping out your risk capital.
You should also develop risk management guidelines. When I speak of risk, I am generally speaking about how much you are willing to lose out of your account if trades do not go in your favor.
You also should develop two risk guidelines; first, determine how much risk you are willing to take on any single trade and second, determine the total risk you are willing to take when in multiple trades at the same time.
You may be asking then what an acceptable amount of risk is. And, really it is something that may be different for everyone, based on your personal risk appetite. But let me show you an example using a maximum risk of 3%.
For this example, I am using a $5000 mini account and risking no more than 3%. In this case the acceptable risk/loss equals $150 dollars. At 1 mini lot that $150 equates to 150 pips, at 3 mini lots that equates to 50 pips. Once you determine you maximum acceptable risk/loss you can then adjust your lots and stop accordingly to fit within your risk guidelines.
Whatever the amount of risk you deem acceptable, remember that these should be considered maximum acceptable losses and this doesn’t mean that every trade every time should be at maximum risk. This is to say that every trade has unique characteristics and you as the trader need to determine if the maximum risk is appropriate on a particular trade.
I hope this helps as you look to open or manage your Forex trading account.
