Why forex trading is like learning to ride a bike.
Do you remember when you were young, and like most, you got your first bike with training wheels? A tricycle. Do you remember how excited you were that now you could go faster than running would allow? Do you also remember that after falling, getting back up, and trying again, your training wheels were finally taken off and you were allowed to be free?
How did that feel? Finally, being able to ride the bike at your own pace and without any help? Do you remember the confidence you had in yourself? You continued riding, and as you got even more comfortable with the bike, maybe you could even perform stunts for your friends in the neighborhood.
If you remember that feeling then translate it to forex trading. What you have in your hands is a new tricycle. You have probably never traded before. So approach it with the safety wheels on first by demo trading for some time and working out the nuts and bolts of the trading system and the market itself.
Mr. Market is a dangerous enemy but a loving friend if you follow his rules. And the first rule of thumb is, ‘Do Not Be Greedy’. Risk management is probably the biggest reason most forex traders kill their accounts. If you want to know if you are among the ones that will kill their accounts soon, read the next part carefully.
When it comes to trading, risk management is more important than your trading strategy. This is in the sense that if you trade a bigger lot size (Trading size) than your account can handle, then you run the risk of running out of money before the market goes in your favor. Let us then look at lot size in depth.
In forex, lot sizes represent the notional value of your position in the market. We have three different lot sizes.
0.01 also known as a micro lot represents a notional value of $1,000 in the market meaning each pip is equal to 0.10 cents. (A pip is a percentage in point and measures the amount of change in a currency pair/commodity/index. It is calculated using the last decimal point. Typically the fourth decimal point on most currency pairs and the second decimal point on Yen pairs).
A lot size of 0.1, also known as a mini lot, has the notional value of $10,000 in the market and each pip move equals $1.00.
A lot size of 1, a standard lot, has the notional value of $100,000 in the market and each pip move equals $10.00.
The following table will now illustrate the recommended lot sizes per account size.
The lot size for an account that has $100 ( 0.01) in it means that the market will need to go 1,000 pips against you before the account loses the whole $100 since a pip is equal to $ 0.10. Since 1,000 pips is a very big move, a small lot size will give you ample time to adjust your trading strategy if you notice the market has started going against you. But if the same account size was to trade 0.1 it would only take 100 pips for the account to be blown.
| Account Balance($) | Lot Size |
|---|---|
| 100 | 0.01 |
| 200 | 0.01 |
| 300 | 0.02 |
| 400 | 0.02 |
| 500 | 0.02 |
| 600 | 0.03 |
| 700 | 0.03 |
| 800 | 0.03 |
| 900 | 0.03 |
| 1000 | 0.04 |
| 2000 | 0.1 |
| 3000 | 0.14 |
| 5000 | 0.2 |
Once you get comfortable with how to enter trades and execute them correctly, stop loss, and take profit, you will be ready to place real money in it.
Real money tends to increase how fast we understand things because it engages the second most powerful force whenit comes to forex; our emotions. Our greed and fear, as well as other emotions, move the markets up and down. This is why placing your first live trade will probably be an emotional event so as a word of caution only place risk capital – money you are comfortable losing.
Once the training wheels are off and you have live cash in the game, now you’ll be at the stage of riding your bike around the neighborhood with your friends. Remember you are still learning, so do not take big risks as you test out what is comfortable for you. Continue to practice with live money and your riding style will finally show.