Forex Mistake #Small – Does Size Really Matters?

Why Choosing a Wrong Account Size Could Get you Broke?

Did you know that it takes only seven seconds for the food to get from the mouth into stomach? Or that a single hair can withstand up to three kilograms? Or that the thumb length indicates the length of the penis? Did you know that women blink twice as often as men do? Women have already read all the text. Men still look at their thumb. I’d say that the size do matter. I wonder, if there is anything that can calibrate the size of your trading account. One thing is for sure: you cannot have great performances with your small “thing”. And I am referring to your trading account here. Stop looking at your bloody thumb now.

 

How Size Really Matters?

I am not sure if traders are not aware of the fact that the size do matter in Forex, or they are aware, but are ignoring it. I met a guy – sivricmarijan – on babypips.com who is preparing to quit the demo and make his first deposit into a real money account. Only that he is saying this: ”I was thinking about investing some small amount of money just to get a feeling of real trading.” I have to say I was more shocked to see a senior member encouraging him. Kevin LaCoste – this is the senior member’s nickname – answered to sivricmarijan: “There’s nothing wrong with going live with a small account. Key word: small.” If you want to read more about this, you can do it on this link: http://forums.babypips.com/newbie-island/63218-my-stats-what-should-i-do-next-should-i-invest-real-money.html. If you ask me, I would say that the key word in this case is “failure”.

 

Let me tell you a little story: One day, some journalists came to visit a loony bin. One of them asked the manager how the doctors know when a patient is healed. The manager answered: we fill the tub with water and leave there a spoon and a cup. Then we ask the patient to empty the tub. The journalist, smiling, as he already understood the trick, rushed to say: any sane man would grab the cup. The manager, also smiling, answered: any sane man would remove the stopper. So my dear fellows, starting with as little as 50$-200$ real accounts will only empty your pockets. It is unthinkable that you can trade with 50$ using high leverage and trying to apply a risk management and a trading plan. Think that even the biggest hedge funds or the biggest investment banks are having losses from their trades. However, with a good risk management they are able to be in profit at the end of the year. So, my dear traders, assuming that you will not be right all the time, what risk management can you apply to a shitty 50$ account, in a way that every time your stop loss gets triggered, you will still have money for other 30 or 40 trades to take before you get broke? Trading 0.01 lots by using high leverage and a risk management of 2 to 5 percent you have to be so damn good in predicting the market, because you only afford a few pips against you before your stop loss will take your money. Think at the Forex market as at a loony bin (you are not wrong thinking like this, believe me)! If you want to get out and be a winner, you have to remove the stopper from your tub with money, otherwise, my dear friend, you are going to take the money with the spoon (50$ account) or with the cup (200$ account) and you will stay for a long time with the doctors, asking what’s wrong with you. And guess what: when you will finish emptying the tub, the doctor will say that you are not healed and cannot get out because you used the spoon instead of removing the stopper. You will pass some more time there, waiting for the tub to get full again and start all over again. Using a 10000$ account and trading 0.10 lots, allows you to use a 1% risk management and to place a 100 pips stop loss. If it gets triggered you lose 100$, but you have the remaining 9900$ to trade with. Try to do the same thing with a 50$ account using the same risk management. That means you afford only 0.50$ loss and in terms of pips is only five pips. I’ve even made a test for you. If you think you are able to place trades with an accuracy of less than 5 pips (including the spread) you should send your CV to Goldman Sachs. I am sure they will offer you a blank check. What you gonna do though, is to increase your risk management or worse, not using one at all. The result? You will clean up your trading account, before you even start trading.

 

 

Conclusion – Size MATTERS

A legitimate question now would be “how big my account has to be?” The right amount of money that you have to deposit in your account depends on the reasons why you started this in the first place. Someone who wants to make the trading his main income source, will definitely have to deposit far more money than someone who is trading a few times a week looking at the trading in the Forex market as a tool to bring value to his savings. Here are a few tips for you:

  • Whatever your reason to start trading is, do not use money that you cannot afford to lose. Do not use your main salary or part of it if that is the base to support your family.
  • Never ever, borrow money to trade with them.
  • Paradoxically, less money you put into your account, bigger the chances to get broke.
  • The risk is reduced with a bigger capital and a better money management and not with less capital and bigger leverage.
  • I am sure you know what “stop loss hunting” is. You can avoid it with wider stop loss orders but you cannot afford wider stop loss orders with a small account.
  • Alexander Elder, in his book “Trading for a living – Psychology trading tactics and Money Management” said: “A person who makes 25% profit annually is a King of Wall Street. Many top-flight money managers would give away their firstborn child to be able to top this. A trader who can double his money in a year is a star – as rare as a pop musician or a top athlete. If you set modest goals for yourself and achieve them you can go very far. If you can make 30% annually, people will beg you to manage their money.” Let’s do a little math together now: 30% of 200$ deposit = 60$/year. That makes it 5$/month. This is the reason you started to trade Forex? For 5$/month?

 

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