15 LESSON OF FOREX

LESSON #10:
Account Size, Lots, Margins, and the Allure of 200:1 Leverage

As you first learned in Lesson #2, no other market in the world allows the LEVERAGE that the exciting world of currency-trading does.

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Sidenote: LEVERAGE refers to margin trading. In the FOREX market, it is essentially the ratio of the amount used in a trade to the required security deposit needed, by the broker, for that trade.

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Normally, for most brokerages (at least the ones we recommend), a margin deposit of just $1,000 allows you to control a $100,000 position in the FOREX market. That's 100:1 leverage, or 1%. Or, said another way, a *regular full-sized account* -- sometimes referred to as a 100k account -- allows you to trade with lot sizes equal to $100,000. Each lot is worth $100,000 in currency. It will only_require_$1,000 to trade one lot (aka, "contract")

Think about this for a moment (it is what makes this market the hottest market to trade in right now): The FX broker has loaned you $99,000 dollars secured only_by_your $1,000. This is HUGE and, as you know by now, is what allows traders to make extraordinary incomes in this market. And, as you also are probably used to hearing - "leverage is two-edged sword" - it is what can cause you to lose a lot of money if you trade without rules or Stop-loss orders.

But, for argument's sake (and to keep the continued tone of this course on encouraging you to become a FOREX trader), let's just say you WERE the person to trade with reckless abandon -- with no common sense, no strategy, no money- management principles, etc. While we don't recommend that ... still, consider this:

Unlike Futures (Commodity Trading), the market that most people associate with HIGH leverage, you can never have a debit balance when trading FOREX!

So, despite the greater leverage associated with FX trading, it's still arguably less risky than futures trading. Futures markets are often prone to sudden and dramatic moves, against which you can't protect yourself, even by trading with protective stops. Your position may be liquidated at a loss, and you'll be liable for any resulting deficit in the account. But because of the FX market's deep liquidity and 24-hour, continuous trading, dangerous trading gaps and limit moves are eliminated. Orders are executed quickly, without slippage or partial fills.

And finally, there are no margin calls -- for your protection, the FX broker's trading platform will automatically close out some or all of your open positions if your account equity -- meaning the total floating value of the account -- falls below the level required to hold the positions. Think of this as a final, automatic stop, always working on your behalf to prevent a debit balance.

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A Quick NOTE about Margin:

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Besides being generous with their margin requirements (LEVERAGE), FX brokers also are very flexible with you. In other words, you are able to select the degree of leverage, or "gearing" as they call it, that you feel works best for you. The default margin for most brokers is set at 1% (and, of course, most traders prefer the lowest possible margin requirement), but if you prefer to trade with less leverage, some brokers allow you to trade with a 2% margin.

For instance, if you start with a 2% margin, then it will cost you $2000 to place a one-lot trade on a 100K (full) account. Your leverage is now 50:1 versus 100:1. As discussed in Lesson #3, currency moves in price-interest- points (pips), and in a regular (100K) account, each pip is worth about $8 to $10.

Mini Lots VS. Full-sized Lots
and How to Achieve up to 200:1 Leverage:

The Mini Account (explained more below) uses a different leverage calculation than a regular (100k) account. Instead of trading full-size currency lots (100,000 units), you'll trade in lots that are just 1/10 the size (10,000 currency units), which greatly reduces your risk. Pips in a Mini Account are worth, on average, $1 instead of the $8 to $10 mentioned above. The Mini FX account offers up to 200:1 leverage -- just a $50 margin deposit allows you to trade lots worth roughly $10,000 -- but the smaller lot sizes, with correspondingly smaller pip values, means that you'll be assuming less total risk. For example, while a 20-pip loss on a 100,000 EUR/USD position would be $200, the same loss on a 10,000 EUR/USD position in a Mini account would amount to $20.

So, here's the OVERVIEW of LEVERAGE (Margin, Account Size) on each of the two accounts discussed above:

100K (Regular Full-sized Account) - Minimum required account deposit = $2,000 - Recommended required account deposit = $5,000 to $10,000 - Traded in 100,000-unit currency lots - Default Margin: set at 1% ($1,000 per lot) - Leverage = 100:1 or 50:1 (if margin is set at 2%)

MINI Account - Minimum required account deposit = $300 - Recommended required account deposit = $2,000 - Traded in 10,000-unit currency lots - Default Margin: set at 0.5% ($50 per mini-lot) - Leverage = 200:1

Because there is no downside to trading a MINI Account (i.e., you're still entitled to all the benefits that full- size FX account holders enjoy - same state-of-the art trading software, charts, resources, and tools, etc.), and it is ideal for a new FOREX trader to develop a disciplined, rational forex trading strategy without excessively focusing on profits and losses (note: with less than $5,000 starting capital, you can't be WRONG too many times when trading with a regular account). . . we've developed an extensive complimentary course on how to use a MINI account.

If you haven't already read "Forex Freedom", just follow these instructions:

START SMALL, BUILD UP CONFIDENCE !!

There is NO MAXIMUM trade volume on the Mini account. Although the standard trade size is 10,000 units – you are not limited to trading one lot! For instance, you can trade 10,000 units, 50,000 units or 150,000 units. This means as you become more seasoned and build up confidence you can slowly increase the size of your positions to maximize profits (and losses). In fact the trade size of 10,000 units allows for more flexibility in terms of customizing the size of your trade. The ability to customize the size of the trade enables better risk management.

DEVELOP YOUR TRADING SKILLS WITHOUT FOCUSING ON P&L !!

When trading 100,000 currency unit lots in a regular, full- size account, if you have a relatively small balance, you may tend to fixate on your equity fluctuations and sometimes base trading decisions on emmotional reactions to these fluctuations. Many traders, for example, resist closing-out unsuccessful trades at a loss, because they hope that the market will turn in their favor. Conversely, many tend to immediately take profits when the market moves in the desired direction, rather than maximizing their gains by allowing profits to run. With less capital at stake in a Mini FX account, however, you can develop a disciplined trading methodology -- as well as the confidence needed to be a successful currency trader -- without the anxiety and distractions that come with large P&L swings.

How to capitalize on these two advantages of the MINI account is exactly what we teach you in "Forex Freedom" -- we hope you enjoy it as much as Robert enjoyed writing it.

It is our goal to serve you with the best FOREX trading content on the planet. We have been labeled "the premier go- to website for value-packed, self-taught FOREX education & training." If you're not into forking out hundreds, or even thousands of dollars for seminars, DVD's and conference calls, we think you'll thoroughly enjoy what we have to offer.

Until tomorrow's lesson, just remember, "Life is Short, Eat Desert First."