Capitalization

Because of the amount of leverage which Forex offers, it’s easy to get in over your head, and all previous advice about position sizing and limiting your losses should not be disregarded just because you ‘can’. Typically, you can trade with leverage of 100 to 1, which means the standard Forex contracts of 100,000 units, such as $100,000, can be traded with $1000.

The smallest unit of movement in Forex is called a ‘pip’, which is a ‘percent in point’, or percent of a percent. That means it’s the fourth decimal place, so for example with the GBP/USD the quote might be 1.5126, and a fall of 15 pips would make it 1.5111. When you work it out, every single pip change amounts to $10 when you’re trading a standard size, so this fall would be $150. A typical currency pair might swing about 100 pips in a day, although the volatility varies.

You may be tempted by the idea that you can capture a gain of, say, 60 pips, and with your $1000 contract make a profit of $600. As leverage applies both ways, you must watch your stop loss positions, and never buy more contracts than your capital will allow to fail. If you started your trading with $10,000 and bought 10 contracts, and you rode the loss down 60 pips you would be out $6000, and only have $4000 left in your account. You are losing money far too quickly to look forward to a trading career! You may even lose so much that you are subject to a margin call, and this would involve you finding funds outside of your trading account.

There is an alternative that makes the start of trading on the Forex markets a little easier. You can trade something called the Forex Mini, which is based on $10,000 or 10% of the value of the standard contract. The margin is usually fixed at half percent, which means you only need $50 for each lot you trade. This is a good way to get your feet wet in the markets, but being subject to high leverage as with the bigger lots, you still have to take care not to overcommit your funds. Just make sure that your trading cannot quickly decimate your account, by considering the number of contracts and the stop loss position that you will take.

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