How Much Should you Open your Mini Account with?
A Lesson in Money Management
New traders usually ask, “What is the minimum to open an account?” This is true in forex as well as in all other financial markets in the world. It is natural to ask this question. After all, many feel that if they open an account with less, they don’t have to worry as much. This can’t be further from the truth.
Even though all customers that open a mini account with $250 or more get our unique e-book, the actual amount should be based on the stop loss and trade size used.
In the professional trading community, it is generally accepted that the maximum amount a trader should risk per trade is less than 5% – and preferably 2% or even less. If we take the minimum deposit to open an account ($250) and take 2% of that, we come up with $5. Since a stop loss from 15 to 20 pips is frequently used for active day trading in the FX market, let’s assume that you want to set your stop loss orders at 20 pips away from your entry price (if you don’t understand any of this, read through the basics in the education section of this site).
In this example, we’re going to assume that you want to buy EUR/USD based on your trading strategy. A pip for this currency pair is worth $10 USD per standard Lot; that is, per 100,000-unit lot. Consequently, a 20-pip stop would be Equivalent to $200 per Standard Lot.
If we divide the $5 maximum loss we are willing to take in a $250-account (2%) by $200, we come up with a maximum trade size of 0.025 standard Lots, or 2,500 units of the base currency USD. Since the smallest size you can trade on the platform is one micro Lot, or 1,000 units of the base currency, and the trade sizes have to be in multiples of 1,000, you need to trade 2,000 units (2 micro Lots) or less to keep the percentage loss under 2% using a 20-pip stop (NOTE: the actual % loss a trader would incur trading 2 micro Lots or 2,000 EUR and using a 20-pip stop loss is $4, which is 1.6% of the $250 account value).
What About if an Trader wants to Use a Bigger Trade Size?
Let’s say that in the example above, a trader wanted to trade one mini Lot (0.1 standard Lot or 10,000 EUR) instead of two micros. That position would be 5 times larger than the previous 2,000-EUR position, meaning that the loss would be 5 times greater using the 20-pip stop loss. If we multiple the above 1.6% potential loss by 5, we get a figure of 8% or $20. An FX trader that risks 8% on ever single trade won’t be in the game for long! All it takes is several back to back losses (which every trader will experience sooner or later) for the trader’s account to be wiped out.
If a trader actually wanted to trade a Mini Lot at a time and only risk 1.6% per trade while using a 20-pip stop ($20 per Mini Lot), he would have to open an account with $1,250. To come up with this figure, we simply divide $20 (the dollar value of the stop loss for a Mini Lot trade) by 0.016.
As observed above, you can actually make trading safer and maximize your potential trading currencies by depositing more in your account rather than less! Consequently, instead of opening an account with the “minimum” account size accepted by the broker, a trader should deposit enough funds so that the loss per trade is kept manageable based on the trade size and stop loss desired.
How About if I just Set a Smaller Stop Loss?
New traders typically ask the question above. At first, it might sound like a logical thing to do. Why not just set smaller stops?
The problem is that due to the natural volatility of the market, you cannot really set a stop loss that is much smaller than the one used in the example above. If you do, you will more than likely get stopped out of the market a lot and your losses will multiply rather quickly – so this technique does not work.
In conclusion, even though you can open a mini account with just $250, we strongly suggest that you open your account with enough funds depending on the trade size you want to use and your desired stop loss. That may be $250 for some clients, but $1,000 or more for others. Each trader should make the appropriate decision based on his trading objectives.
IMPORTANT: When you open AND fund your account, you will receive your account number via email. Once you have your account number, click here to fill out our request form and receive your mini e-book.