A practical and disciplined money management plan is essential for profitable trading. Traders who do not take this requirement seriously probably have low Trader IQs and are merely gambling.
Objectively review the discretionary components of your Money Management plan.
• How much capital can you risk, and by risk we mean afford to lose?
• What margin percentage of your usable account balance do you risk on each trade?
• What leverage ratio do you apply to the margin?
• How much profit do you expect to make?
• Calculate your profit goal, as an annualised return on your account balance - is it realistic?
• How much capital can you risk, and by risk we mean afford to lose?
• What margin percentage of your usable account balance do you risk on each trade?
• What leverage ratio do you apply to the margin?
• How much profit do you expect to make?
• Calculate your profit goal, as an annualised return on your account balance - is it realistic?
Only about 2% of Forex traders achieve an annual return exceeding 100%, an extraordinary result by any rational expectation.
Capital
The funds you use to trade Forex are at considerable risk. The extent of your risk depends on your choices; i.e., the broker you choose and the trades you make. Only risk money you can afford to lose when trading Forex.
The funds you use to trade Forex are at considerable risk. The extent of your risk depends on your choices; i.e., the broker you choose and the trades you make. Only risk money you can afford to lose when trading Forex.
That said, not having sufficient capital is a significant reason for such high self directed trader attrition rates. An under capitalised account dramatically reduces the probability of success, making it extremely difficult to implement prudent money management.
This is an approximate guide for the recommended capital to open various Forex accounts.
• Standard Account $50,000 to $100,000+
• Mini Account $5,000 to $20,000+
• Micro Account $1,000 to $5,000
• Standard Account $50,000 to $100,000+
• Mini Account $5,000 to $20,000+
• Micro Account $1,000 to $5,000
Be patient. Rather than rushing to open an undercapitalised account wait and accumulate the maximum possible capital you can risk.
Equity
Adding the used margin to the available, or useable, margin determines account equity. When there are no open positions the Account Balance, Equity and Available Margin are the same.
Adding the used margin to the available, or useable, margin determines account equity. When there are no open positions the Account Balance, Equity and Available Margin are the same.
Margin
Initial Margin is the amount put at risk to collateralise a trade and is expressed as a percentage of the trade’s total value. The initial, or used, margin is the security deducted from an account, and is often leveraged. Brokers usually aggregate initial margins to fund their own trading.
Initial Margin is the amount put at risk to collateralise a trade and is expressed as a percentage of the trade’s total value. The initial, or used, margin is the security deducted from an account, and is often leveraged. Brokers usually aggregate initial margins to fund their own trading.
What remains is the available, or usable, margin. This fluctuates with a trade’s value. When the remaining margin falls below the broker’s acceptable margin requirements open positions are liquidated by a margin call.
Please carefully read broker’s margin policies, and ensure you fully understand the different margin terms, especially the margin call policies. Where a broker has a margin policy of 1% a leverage ratio of 100-1 is available, 2% equates to leverage of 50-1, 2.5% to 25-1, 5% to 20-1, and so on.
We recommend Self Directed Trader margin of 1% to 5%, subject to the leverage chosen, positions open, and market conditions.
Leverage
One compelling reason for the rapid expansion of online Forex trading is the high leverage offered by many brokers. The National Futures Association defines Leverage as: “The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.”
One compelling reason for the rapid expansion of online Forex trading is the high leverage offered by many brokers. The National Futures Association defines Leverage as: “The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.”
Leverage is expressed as a ratio, e.g. 10-1, and is unquestionably an appealing notion. We open a $1,000 account with a Forex broker offering 500-1 leverage, and willing to instantly lend us $499,000. Voila! We now have a $500,000 trading bank, and can make 100% return on our capital with only a $1,000 profit. Sounds easy enough. Consider this, you will lose 100% of your capital with a $1,000 loss, and that may only take a relatively modest market move or retracement against your position. Trading with these levels of leverage reveals a very low Trader IQ as it dramatically increase the risk of loss. Those using such strategies are known in some brokerage circles as wood ducks – easy prey.
Leverage is a useful tool for those who know how and when to use it. That means judiciously, after you begin to consistently take trading profits. Think of leverage as a scalpel, not a chain saw. And remember, with most brokers you can change the leverage for different trades to reflect your confidence of success.
Most professional Forex traders use leverage between 2-1 and 5-1. Self Directed Traders may claim this is unrealistic for those with small accounts, and some may want to use leverage up to 50-1 in conjunction with a sensibly low margin. This is not totally unreasonable, however, the smaller the capital the greater the need to protect it.
Let us serve you, join us today at Emalbans Fx.Happy Trading
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