Leverage is essentially the amount used in a trade compared to the margin needed by the broker for that trade. Forex offers the most leverage of any type of investment which for most brokers is 100:1, so if you put up $1000, the broker will earn that $100 000 when trading.
So by investing $1000, you can control $100 000 worth of currency in the market. This is what enables traders to make such impressive incomes and it is also the downfall of less experienced traders if you don’t manage your equity properly and stop losses. I’m going to introduce you to mini-account trading where you can get started and lose a few times without losing a hair in the process. Normal, full-sized accounts require $5000 to $10000 to start implementing an effective equity management plan, meaning you can only lose a few times before you’re out of the game if you don’t have that much money and as we all know, by trading wisely, you can maximize the odds in your favor.
For someone who likes to stay completely out of debt, Forex is the best investment option; you can only lose what’s in your trading account, nothing more. If your open positions are risking more than what is in your account, your brokerage software will automatically close them until you cover the ‘at risk’ amount. Futures markets are prone to sudden and dramatic movements from which you cannot protect yourself, and you are responsible for any shortfall in your account. You could lose more than you have in your account and potentially everything you own!
Mini Account Advantages
For someone who wants to maximize profits and has a few thousand dollars to spend a mini account might sound retarded (maybe that’s just me), but it offers more benefits than a regular account unless you have a lazy 5000 US dollars to spend. The biggest benefit is that you make $8 or $10 per pip instead of $1 and a $50 account moves about $10 000 in one go instead of a $100 000 move of about $1000. Your leverage is 200:1 with a mini account and you continue to enjoy all the benefits of the latest trading software, charts, resources, and tools without the pressure of winning on every trade. Remember that by using an equity management plan, even if you lose 7 times in a row, you can still come out on top by minimizing losses and maximizing profits. Good traders know that the odds are stacked in their favor.
Considering that you generally don’t want to risk more than a maximum of 5% on any one trade, an account size of $2000 will get you on your way with a mini account. The preferred rate is 2% of your margin account.
You can also trade more than 1 lot at a time to increase your returns as your confidence grows. As your account grows, so does your trading capacity, so 2% of your account can be much more than the risk involved in one trade. Mini accounts do not have a maximum trading volume.
Trading with a mini account keeps you in the game without focusing too much on profit and loss. The trader may resist closing a failed trade in the hope that it will bounce back or lock in profits too early, instead of letting profits grow. With a mini account, you can develop the discipline needed to succeed and confidence without the worry or distraction associated with large profit and loss swings.