“So if you only have $60,000, open a mini account. If you only have $8,000, open a micro account. If you only have $250, open a demo account and stick with it until you come up with the additional $750, then open a micro account. If you have $1, find a job.”
When you talk about $8000, if in gbp would i need £8000 or would i need £5100 (depending on rate!) to fit the above recommendation?
This is just one example of the usd/gbp question that has popped up in my mind a few times.
Your question hasn’t received a reply from anyone else, so let me take a crack at it.
[B]The quick answer is £5,100 (not £8,000).[/B] Let’s see why.
And, let’s use the big numbers first — that is, $100,000 account for trading standard lots.
The [I]notional value[/I] of one lot of a particular currency pair, say 1 lot of GBP/USD, is the same all over the world, regardless of the account currencies of the traders who are trading it.
Specifically, if I have an account denominated in USD, and you have an account denominated in GBP, and we each open a 1-standard-lot position in GBP/USD (or any GBP-pair), both positions (yours and mine) have a notional value of 100,000 GBP.
In your case, you know immediately the notional value of your trade (£100,000), without having to perform any currency-conversion calculation, because GBP is your account currency.
In my case, however, I have to be aware that I am opening a position with a notional value of $157,000, and to get that figure, I have to use the current price of GBP/USD (1.5700).
So, using the [I]School of Pipsology[/I] recommendations, if a $100,000 account is sufficient for trading one standard lot at a time — including any pair with a high notional value, such as GBP/XXX pairs — then the [I]GBP-equivalent of $100,000[/I] would be sufficient for the same purpose in a GBP-denominated account. In other words, £64,000 (rounded up).
Still using the [I]School’s[/I] recommendations, we can scale down from a $100,000 (or £64,000) standard account, to the following smaller account sizes —
• $10,000 (or £6,400) mini-account (in which minimum position-size is 10,000 units),
• $100 (or £64) nano-account (minimum position-size 100 units), or
• $1 (or £0.64) unit-account (minimum position-size 1 unit of base currency).
Clearly, these [I]School[/I] recommendations are based on the formula that you should have an account balance large enough to trade one lot (standard lot, mini-lot, micro-lot, etc.) with [I]roughly[/I] 1:1 actual leverage.*
These are conservative recommendations. If you told me that you intend to open a micro-account with $500 (or £320), and you intend to trade single micro-lots, [I]I[/I] would have no problem with that (although the author of the [I]School[/I] lesson might).
Trading single micro-lots in a $500 (or £320) account is essentially trading with 2:1 actual leverage*, and this is perfectly acceptable for a beginning trader, in my opinion. See the note below on actual leverage.
Note: In a $100,000 (or £64,000) account, trading a single lot of any USD/XXX pair involves 1:1 actual leverage.
Trading a single lot of any pair which does not have the USD as its base currency involves a notional value other than $100,000, and therefore involves actual leverage other than 1:1.
In the example above, in which a $100,000 (or £64,000) account trades a single standard lot of GBP/USD, or any GBP/XXX pair, the notional value of the trade (currently) is $157,000 (or £100,000), which means that the actual leverage used is 1.57:1, in either the USD-denominated account or the GBP-denominated account.
…aided (if absolutely necessary) by your handy pocket calculator.
The detailed steps that I went through in my reply to [I]h0rse[/I] were simply to answer his question fully. You won’t have to do all those mental gymnastics in your day-to-day trading.
But, you will need to have a firm grasp of the principles of position sizing, and how position-sizing relates to actual leverage used. When you have become expert at determining your position sizes [I]based on the RISK you are willing to take in your trading,[/I] you will find that [I]actual leverage used takes care of itself,[/I] and you don’t even have to think about it.
There are Position Size Calculators all over the internet, including here on the [I]Babypips[/I] site.
To access the [I]Babypips[/I] calculator, start with the TOOLS tab at the top of this page. Then the search-path is: TOOLS > Forex Calculators > Position Size Calculator. Spend some time working with that calculator.
Figure out why it sometimes asks you for an an additional pair price, and sometimes it doesn’t.
And take note of the fact that it doesn’t ask you for the actual leverage you intend to use, and it doesn’t figure actual leverage for you. That’s because, when you have your risk properly controlled, the leverage you are using is properly controlled, as well.