When Trading Forex, Account Size does not Matter
In This Video:
00:54 A Popular Misconception with Account Sizes
02:34 An Amazingly Versatile Calculator
03:48 Why the Lot Calculator Makes a Difference
Did you know that if you wish to trade the longer time frame charts, you don’t need to have a large account size in order to do that?
So let’s talk about that and more, right now!
G’day Forex traders, it’s Andrew Mitchem here, I’m the Forex Trading Coach, and today it’s Friday, the 20th of February and I want to read out an email that I’ve had here from Taminash, who’s written to me and said:
“You’ve mentioned that you risk about half of one percent on your account when taking most of your trades and trades are between one and a half and about three risk-to-reward return.
So, my question is how big a size account do I need to start trading Forex if I wish to make a living out of it.
One trade you showed has a stop-loss of 62 pips, which means the account size should be about a $120,000 if you are risking half or one percent on your account.” – That’s the email!
A Popular Misconception with Account Sizes
That’s actually incorrect! You see a lot of people have the perception or the thought that you need to have large bank account size because you’re trading longer time frame charts that have bigger pips, as stop losses. And it’s completely false and unfortunately, when people start thinking about the number of pips that they’re making or the number of pips they’re risking, they think that I can’t risk 62, as in that example on the email, or 162 because it means that if I get stopped out, I’m going to lose too big a percentage on my account.
It’s just something that’s just, you need to change your thinking and your mindset and understanding of money management or risk in order to completely change around what most people tell you on the Internet because chasing pips and trading for pips, to me, just isn’t the way to go!
Using my Lot Calculator to Help Plan Trades
So, if you think of it this way, well first of all, make sure you get my Lot Size Calculator – it’s freely available on my website – just get yourself a copy and it will help explain and all the information I’m about to share. Plus, it will allow you to trade really easily and accurately. So, the way that I like to trade is regardless of the currency pair that I am trading, regardless of the direction, regardless of the time-frame of the charts, and regardless of the pips, as in the stop-loss amount, every trade has equal risk. So, for me it’s half of one percent – for you it might be one percent or a quarter or whatever it might be – whatever suits you as a risk tolerance, ensure that every trade has the same risk.
So how do you go about doing that because I can already see and think of a lot of people saying, “How do I do that?”
An Amazingly Versatile Calculator
Well, all you need to do is you change the position size, the lot size, that you place on a trade according to the trade that you’re taking, and its stop-loss and its currency pair. So, there is a mathematical equation in order to do that but the Lot Size Calculator that I have freely available for you to use and download, does that all for you!
It recognizes the denomination of your accounts, whether you are trading in US Dollars (USD) or British Pounds (GBP) or New Zealand Dollars (NZD), whatever it is. It notes the account size that you have on your balance at the time. It knows the chart that you are trading because you are dragging a script, an MT4 script onto a chart so it knows the payout that you get paid per pip for that particular pair, because of course all pairs vary, and you then enter the risk tolerance, set a default half of one percent (0.5%).
The only thing that you actually need to enter is the number of pips you’re risking on that trade. Put that into the equation and it will say you need to trade at 0.32 lots or 1.65 lots or whatever the amount is according to the trade and your account size.
Why the Lot Calculator Makes a Difference
What that does is that it places every trade as equal. So, if you lose a trade on a five-minute chart trade that has, let’s say for example, a 12-pip stop loss, you lose half of one-percent. Take it to the other extreme – if you place a trade on, let’s say, a daily chart with a 153 pip stop-loss, to make up an example, and that trade loses, you lose half of one percent.
The only thing that’s changed is the position size you take. Obviously, the smaller time frame has a lot bigger position size than the longer time frame but the risk, the monetary risk is equal. And that’s the bit that’s key – you see, if you can have your trades at somewhere, like the email said for me personally, somewhere between one and a half or three to one return, as an average, you can have several losing trades but a few good trades more than makes up for that, plus more.
The other thing that’s quite an underestimated part of trading of course is the whole head and heart situation – the psychology behind trading! If you have a pre-known risk when you enter that trade, you can place that trade with the comfort and reassurance that if that trade gets stopped out, I know the maximum I can lose for that one trade. So, therefore, you’re not sort of chasing the trade and you’re not becoming emotionally involved in that trade.
Every trade is equal – doesn’t matter what the currency pair, what the time frame, what the stop loss is – they are all the same. And that really does help you with your trading psychology. It just makes your trading a whole heap calmer and a lot easier.
A Wrap-up of the Week that Was
Onto the charts, just a quick wrap-up of what’s happened this week – I’m short on gold right now on a trade behind me but the one that’s been an awful pair to trade, on the longer time frame charts especially, has been the Euro/US Dollar (EUR/USD). You know with the whole Greek situation and you look back at the last two or three weeks on the Euro/US Dollar (EUR/USD), it’s been up one day, it’s been down, it’s been up – it’s been like a yo-yo – not a good pair to trade at this particular point, on the longer time frame charts.
So when you see those type of range-bounce situations, there’s actually bit of a wedge forming on the charts and, so, something’s going to happen soon because the price on any currency pair doesn’t like being, sort of, tight for too long. Something will break out one way or the other. Don’t know what that is yet because I can’t see that information on the charts.
But, when you get sideways movement and you get sort of, just, range-bound prices like the Euro/US Dollar (EUR/USD) is right now, just don’t trade at all or change time frames to much shorter time frames if you want to trade it. But on the longer time frame charts, right now, I just can’t see any point because there’s no clear direction on the Euro/US Dollar (EUR/USD). I’m hoping, by the time maybe you watch this video and into next week, that may have changed because, like I said, something very soon is around the corner.
Either the Euro/US Dollar’s going to break up or down, one way or the other and we could, then, see some good trends. But right now, I can’t see anything so I’m looking at other time frames and, particularly, other currency pairs on the daily charts.
My Latest Live Training Room Webinar
Just want to finish by letting you know that I held a live two-hour training room webinar for my clients last night. I took two trades on the one-hour charts – one was profitable, the other was not. But overall, out of those two, there was still a profit to be gained due to the higher returns on the profitable trade and I also had trades on the four-hourly charts, the six-hourlies and the 12-hourlies.
Now the great thing with those charts, those longer time frame charts – the four, six and twelve – is you don’t need too much time spent watching your charts and being at the screen. You don’t need much time at all. The four, the six and the twelve, all change over, twice a day, at exactly the same time, which is 5pm New York time and 5am New York time. So, you can trade multiple time frame charts to see the best technical setup all at the same time. You don’t need to be glued to your screen all day, which again is a big problem of many new traders.
It’s great to spend time watching charts and getting the experience of the price moving up and down at different times of the day, different days of the week but, longer term, you don’t want to be sat glued to your charts. Well, I’m guessing you don’t – I don’t anyway. Probably most people who’ve been trading for a long time don’t want to because there’s better things to do and you can make more money by trading better, higher quality setups on longer time frame charts, and go and do other things while the trades are actually working behind the scenes for you.
So, hope that helps. This is Andrew Mitchem from the Forex Trading Coach. Have a great weekend and a fantastic trading week, next week. Look forward to talking to you, next Friday.
Bye for now!