How Much Capital Should I Trade Forex With?
Research shows that the amount of capital in your trading account can affect your profitability. Traders with at least $5,000 of capital tend to utilize more conservative amounts of leverage. Traders should look to use an effective leverage of 10-to1 or less.
In looking at the trading records of tens of thousands of clients from a major FX broker, as well as talking with even more traders daily via live webinars, Twitter, and email, it appears that traders enter the Forex market with a desire to cap their potential for losses on their risk based capital. Therefore, many newer traders choose to start trading forex with a small capital base.
What we have found out through the analysis of thousands of trading accounts is that traders with larger account balances tend to be profitable on a higher percentage of trades. We feel this is a result of the EFFECTIVE LEVERAGEused in the trading account.
Since many smaller traders are inexperienced in trading forex, they tend to expose their account to significantly higher levels of effective leverage. As a result, this increase in leverage can magnify losses in their trading account. Emotionally spent, traders then either give up on forex or choose to compound the issue by continuing to trade in relatively high amounts of effective leverage. This becomes a vicious cycle that damages the enthusiasm which attracted the trader to forex.
No matter how good or bad your strategy is, your decision (or non-decision, as the case may be) about effective leverage has direct and powerful effects on the outcomes of your trading. Last year, we published some tests showing the results over time of the same strategy with different leverage. You can read it in the article Forex Trading: Controlling Leverage and Margin.
In figure 2, we have modified 2 elements of the chart in figure 1. First, we renamed each column to represent the highest dollar value that qualified for the given column. For example, the $0-$999 equity range is now being represented as the $999 group. The $1,000 - $4,999 equity range is now being represented as the $4,999 group. And likewise, the $5,000 - $9,999 range is now being represented as the $9,999 group.
The second change made was that we calculated the average trade size of each group and divided it into the maximum possible account balance for that group. In essence, this provided us a conservative and understated effective leverage amount. (A larger balance reduces the effective leverage so the red line on the chart is the lowest and most conservative calculation of the chart.) For example, the average trade size for the $999 group was 26k. If we take the average trade size and divide it by the account equity, the result is the effective leverage used by that group on average.
As the effective leverage dropped significantly from the $999 group to the $4,999 group (red line), the resulting proportion of profitable accounts increased dramatically by 12 basis points (blue bars). Then, as further capital is added to the accounts such that they moved into the $9,999 category, the effective leverage continued to incrementally drop pushing the profitability ratio even higher to 37%.
Game Plan: How much effective leverage should I use?
We recommend trading with effective leverage of 10 to 1 or less. We don’t know when the market conditions will change causing our strategy to take on losses. Therefore, keep the effective leverage at conservative levels while using a stop loss on all trades. Here is a simple calculation to help you determine a target trade size based on your account equity.
Account Equity X Effective Leverage Target = Maximum Trade Size of All Combined Positions
A trader’s account size and the maximum trade size based on 10 to 1 leverage. That means if you have $10,000 in your account, then never have more than 100,000 of open trades at any one time.
The precise amount of leverage used is decided entirely by each individual trader. You may decide that you are more comfortable using an even lower effective leverage such as 5 to 1 or 3 to 1.
Most professional traders enter into trading opportunities focused on how much capital they stand to lose rather than how much capital they are looking to gain. Nobody knows the future movement of prices so professional traders are confident in their trading approach but conservative in their use of effective leverage.
Adjusting the effective leverage to suit your risk tolerance
Our research indicates that accounts with the smallest capital base (the group labeled $999) have an average trade size of 26k for each trade. Their effective leverage is at least 26 times which is significantly higher than the 10 times leverage discussed earlier. If these traders want to trade at no more than a 10 to 1 effective leverage, they would need to make at least one of the adjustments noted below:
Increase their trading account equity by depositing more funds to an amount that reduces their effective leverage to less than 10 to 1. So our average trader, who is averaging 26k trade sizes, would need at least $2,600 in their account to trade 26k on a 10 to 1 effective leverage.
Decrease their trade size to a level that reduces their effective leverage to less than 10 to 1. Use the figure 3 calculations and chart above.
In the chart above, notice how the trade size remains relatively stable as the account equity increases from the $999 group to the $4,999 group. In essence, this indicates that traders are looking for, on average, at least $2.60 per pip (if they average 26k trade size, that is approximately $2.60 p/l per pip in most currency pairs).
There could be many reasons why traders average at least 26k for each trade, or $2.60 per pip. Perhaps they want a large enough trade size to make their time invested trading worthwhile. In other words, traders may be seeking a price per pip value and $2.60 is the minimum threshold on average. If these traders were to use no more than 10 to 1 effective leverage, they would need at least $2,600 in their account to support $2.60 per pip.
Another possibility is that many newer traders simply don’t understand the power of leverage and how one large losing trade can wipe out several winning trades in a row. Using a conservative amount of leverage will help slow down the rate of capital losses when a trader goes through a losing streak.
Regardless of the reasons, our goal is to use conservative amounts of leverage. If you know how much risk capital you have available, then use the chart and calculations used in Figure 3 to determine an trade size appropriate to your account size.
If you have a target “per pip” value, then use the calculations in figure 5 to determine the minimum amount of account capital needed to support your trade size. Increasing your capital base does not mean you will become more profitable. It means that you can stay in a trade longer if it goes against you. On average, traders that use a combination of sufficient capital (at least $5,000) and conservative use of effective leverage (10 to 1 or less) tend to be more profitable.
Many of us trade well but due to the lack of some things in our trade almost all the time there are various negative effects as a result of the loss of trade. But if you trade with some important things or conditions, your trading power will be many times more than before and it will be positive, and if you can make it a regular habit, you will always trade better. Let's find out what are the things that will help you in good trading. 1. Create your own trading plan. 2. Take the help of 2-3 indicators in trading, there is no need to use many indicators. 3. Start trading through Money Management. 4. Trade by setting stop-loss with tech profit in each trade. 5. Take profit according to the duration of trading. Avoid closing profitable trades early and prolonging loss trades. 6. Do not increase the risk with success in a few trades. Do not trade excessively. 7. Do not change the trading plan in the middle of the trade. 8. Do not trade directly on the real account in the new strategy, first check the success rate in the demo. 9 Keep a record of both successful and unsuccessful trades, will be useful next time. 10. Do not trade with robots depending on different readymade auto trading tools. 11. Do not trade against the trend. Remember trend is your friend. 12. Don't take the total risk by getting angry after losing one or two trades. 13. Don't start trading without a fresh mind. 14. Share your trading experience and develop strategy all the time. 15. Trade a certain amount every day or at a certain profit target. When the target fails, finish the trade for 7 days. If the market volatility is not good, do not go to fill the target. 16. Don't trade emotionally, don't be greedy. 16. Do not trade in co-related currency pairs for one-way trades. For example, if you trade both EUR and GPB in a buy or sell order, the profit or loss result will be almost equal and the risk will increase if the market goes against you. 16. Trade with trading possibilities, you will never see any reason for your inexperience in losing trades. 19. In the case of trades, do not expect a profit per trade. 20 In case of short time trades, trade with an understanding of active time sessions
News Impact is of the utmost importance in Forex because it is possible to make a good profit by trading through News Impact. Many Forex news, job reports, speeches are published every day. These affect the market. So many people trade by targeting this news. But should we trade all the news? Not all news has the same effect. Everyone mainly follows forexfactory.com for forex news. Because they publish the best news and publish first. You will see some signs next to each news there. So, when you see the sign, you can understand the effect of that news and you can trade accordingly. High Impact News implies that it can have a huge impact on the market. The impact of medium impact news is relatively small. The impact of low impact news is minimal. The white sign indicates that the news is not economic news, such as Bank Holiday. Since Red High Impact and Orange Medium-Impact news have a big impact on the market, you can trade them or know what kind of impact they can have on the market.
In fact, a very common question for students or those who are studying here is whether they can trade Forex in this situation. Of course, you can answer in one word, but you will do well if you make the decision after confirming some things. We know Forex is a business, so naturally, you need capital. But the thing you need to master before capital is to know the trading system well. Make yourself angry. Now if it is possible for you from your position, I would say if you are a student of O level then think to start a little later, and if you are a student of this level or higher level then you can think now. I answered the curse very straightforwardly. Let's face it - most people can master the Forex trading concept very quickly in developing their talents, but more importantly, whether you have developed enough sentiment for Forex trading, as the business is very sensitive and time-consuming. Cannot be done, requires time-dependent learning and practice. So I am giving a little more priority to the issue of age in this business. I have personally observed that the only reason why young people make more losses in this business is that there is no patience because the effect of the word patience is much more with forex trading. And with age, people can make themselves much more stable, so there is no fear of accidents. And this business creates a lot of stress that is slowly removed in the first place, so if you don't start maintaining a step, you may have to count the losses as a result. So for those of you who are still students, very interested in Forex trading, you can start studying Forex as a subject of your education, with an effective plan of your own. Take things in stride and try not to focus too much on the problem. Learn how to do it right, and learn how to do it right. Continue like this for a long time, then when you become more and more expert, when you have the opportunity to do a huge range, then you can think professionally about good capital in a good way. Basically, the purpose of all these discussions is to make your start beautiful and lasting. There are many who fall into this business with a lot of fuss and then go back to their previous destination and work a negative attitude towards this industry. When a new concept comes to our country, it ends by drowning it. The reason is that we don't start the way we need to. So it doesn't last for us. It does not exist at this stage. But Forex is one of the many high professions in the developed world. So if the idea is to extend interest, then the achievement must also be a time extension.