Trading forex Friday August 29th 2008

This week I have spent more time trading in demo mode than in live mode because I have very little money in my live trading account. I find the more money you have in your account the less worried you are when entering into a trade. I suppose that’s not really a profound finding. It’s just common sense. If you have $5000 in your account you’re not going to be as worried about losing $50 as you will be with $100 in your account.

Speaking of having $100 in your account, it’s hard to believe that there are actually some brokers who allow you to open an account with $100. If you’re thinking about opening an account trading forex with a broker that allows you to open the account with $100, by all means if that’s all you can put up to open the account go ahead and do it, but wait until you build up a bigger balance to start any trading. In fact, I would suggest that you don’t open an account with $100 because in all likelihood you will not have the patience to wait until you build up a bigger balance to start trading, and you’re almost guaranteed to lose your money trying to trade with $100. Note: I caution you to take my advice as just a suggestion coming from a fellow newcomer to the world of forex trading. I’ve only been trading for a little while. As such I am not a qualified expert on the subject.

As for my trading week update, even though I said I would not open any trades after my account value dropped to $102, I still went ahead and entered a trade. It resulted in the loss of $10, so my account value is down to $90. I have decided to go ahead and deposit another $300. It’s really not enough money to trade with if you hope to make money trading, I am fully aware of that; but it’s all I can afford at this time so I will take my chances. I am not quite ready to give up yet.

Meanwhile I have recovered the $1000 lost in demo mode and added $500 more to my balance; so in demo mode I’ve made $1500 this week. Too bad it’s play money.

As for why I am doing better in demo mode than in real mode it’s really not that mysterious. With $5000 you can afford to take more risk than you can afford to take with smaller amounts like $300 for example. With $300 you’re almost setting yourself up to lose because you really don’t have room for error. $300 is probably okay for very skilled traders, but for newcomers who are learning as they go along it will be a miracle if you don’t lose your $300 in a couple of weeks.

I think the key to making money in forex with an account funded with as little as $300 is to get an account that allows you to trade very small lot sizes. I am trading with FXCM and the smallest they allow with a mini account is 10K. I remember at the beginning of the process while trying to figure out what kind of account to open I didn’t want to get the mini account because I was thinking about maximum profits; but after I demoed the mini account and realized it would still be possible to trade 100K lots with the mini account I decided to follow the advice of seasoned traders who advised against opening a standard account with less than $50,000. I opened a mini account, but now I’m thinking it would have been smarter to open a micro account which has even smaller lot sizes.

The thing about the smaller lot sizes is that your profits are smaller. I know for myself this was a huge consideration. I wanted to be in a position to make decent profits in the smallest amount of time possible so an account that limited me to lot sizes under 10K would not have appealed to me; but now that I have experienced trading forex and losing money trading forex, I can see how a micro account might have been better to start out with.  With a micro account your profits might be smaller but your losses are also smaller, which means you it will have more money at your disposal to try to recoup your inevitable losses. It would seem to me that with a micro account, you have a better chance of turning $300 into some kind of profit, assuming you trade smartly, than with $300 in a mini account; but again, I am no expert.

For now I will finish the week in demo while I look for $300 – $600 to deposit into my real account and decide if I want to stay with FXCM or try a different broker, like OANDA.