In this week’s Wednesday Wisdom we’re exploring a TraderRach readers question, “what’s the best size for a forex trading account?” It’s a question that many of us would ask ourselves. Thank you to Eddie Fuentes for contributing this sound question.
“Best” in relation to a forex trading account size is a difficult and impossible question, because what’s best for one forex trader is not best for another. It all comes down to the knowledge, experience, money and risk profiles of each forex trader. The answer is as individual as you are.
Here are 5 questions to ask yourself to help you decide what forex trading account size is the best for you. And remember, what’s best for you now will change over time.
1. What Are Your Skills As A Forex Trader?
Beginner traders have much to learn and can be gobbled up by the markets with innocent naivety and careless mistakes. It’s a natural process where learning to become an expert takes time. Everyone was a beginner once.
The more trading mileage we have the more we learn and there’s nothing quite like first hand experience to give you an “aha” moment.
To ensure you stand the test of time and can survive to expert status, it’s important to trade small when you’re a beginning trader so that inexperience and mistakes don’t wipe you out.
As your experience grows you can transition up to trading more of what you have. Like when you were a toddler you had to walk before you could run.
2. How Much Have You Got To Trade?
When it comes to a forex trading account size, each of us has a certain amount of money that we have available to trade. This can vary incredibly depending on the circumstances of each person.
At one end of the spectrum a forex trader may have saved up a small bit of money from a waitressing job, another may have a large sum put aside from a successful business venture and there are all manner of other wonderful stories and options imaginable.
No matter what your circumstances, it’s sensible to trade a forex trading account no greater than what you have. Your forex trading will likely come to a tragic end if you take large risks that are only appropriate for a forex trading account bigger than it is, or if you put excessive stress on your financial situation.
3. What Are Your Financial Goals?
If you’re serious about forex trading it’s good to have some specific goals written down. One such goal is how much money you make from your trading activities.
What’s a reasonable return is strongly impacted by the size of your forex trading account. It’s not reasonable to expect to make $1 million from a $10k trading account in a short space of time, unless you were taking very large risks that may wipe out your entire account. Now, that’s enough of the extremes.
If you have a specific monetary goal in mind you may want to analyse what size forex trading account to use to have a reasonable expectation of achieving your goals.
4. Is Your Forex Trading Account Parked For Safety?
It’s an interesting phrase “forex trading account”. It’s natural to automatically think that it refers to the amount you have in the account you have with your forex broker.
Do you ever consider what risks there are by leaving your entire account with a broker? Think about the credit risk. It’s a sleeping giant of a risk that can rear its ugly head and steal your account. Just because you can’t see it doesn’t mean it’s not there.
We can use leverage wisely to provide the ability to park some of our trading capital in the relative safety of a bank account.
For more information read Forex Leverage – Don’t Flush Your Trading Capital!
5. What’s Your Risk Profile?
Large risks can scare the living daylights out of some traders while others seem to be wired for it. We all come in with varying risk tolerance sizes.
For most of us who act with financial responsibility, it takes trading mileage to expand our risk comfort zone as we go. As our forex trading progresses we work our way up to taking larger and larger risks on the back of sound trading performance.
So what’s your risk profile got to do with trading account size? If you determine a certain amount of risk per trade that you’re happy to take in relation to the performance of the trading system you’re using, it has a backwards effect on the amount that you will need in your account to trade. Small risks only need a small forex trading account, while large risks need much more.
Over To You To Work Out Your “Best”
The great advantage of forex trading is that it caters for trading at any size. It fits all traders with accounts both great and small. Anything from trading cents per pip on the micro size, to incredible fortunes made (or lost). You’re spoilt for choice.
Start somewhere, trade to survive and then trade to prosper. Find a forex trading account size that fits YOU like a glove and put in place a plan to progress to proud heights.
Decisions about a forex trading account size are just part of an integrated money management plan. Please ensure you have a sound plan in place to balance the risks of trading and your financial aspirations.
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About the Author: I’m Rachel Hunter, TraderRach, a Forex Trader who helps traders achieve the life they love with forex. Be strategic and design your trading business for sustainable success and have fun! That’s my mission. Join many traders’ gaining the edge with “10 Powerful Lessons for Forex Trading Success” plus other goodies. Years of precious learning specially packaged up for you. My background before trading is as a Chartered Accountant and Chief Financial Officer. I know what it takes to make a trading business rock on. It would give me great pleasure to make a difference to your success.