A newbie's question regarding a suitable strategy for a $1,000 account

Beginner Questions
1

I got an email from a new member of this forum, asking about appropriate trading strategies for a $1,000 account. I wrote back to him and said that I prefer to answer this type of question in the open forum, because the discussion might benefit many other readers.

I will copy and paste his emailed question – without identifying his username, in case he’s shy about conversing in the open forum.

Here is his question:

Q:

August 16

Hello Clint,
I wanted to ask you about the best possible strategy (risk management) to trade with a $1,000 account. I just started trading a demo account, which I started with a capital of $1,000, a leverage of 1:50 and a trading lot of 0.5.
Am still trying my hands on it. I tried trading the news by placing a pending order { buy stop and sell stop} away from the price. the thing is that when I place the second order it seems to cancel the order. I chatted with the broker’s customer care personnel and they came up with the answer that I don’t have a enough capital for that trade.
so, you see am still new with FX. And am in dire need of useful tips

Thanks

A:

It’s good that you have adjusted your demo account balance to match the capital you intend to trade with when you go live. Most newbies don’t understand (or don’t care about) the wisdom of that tactic.

Regarding your position size: If “a trading lot of 0.5” means that you are trading half of a standard lot (i.e., 50,000 units of currency), then you are trading WAY too big for the size of your account. And therein lies the answer to your question.

If you are trading a pair in which the base currency is USD (such as USD/JPY), then the notional value of your position (0.5 lot) is $50,000. That’s 50 times the size of your account, and puts you right up against the LIMIT (50:1) imposed on your account (and on all U.S. accounts). So, the moment you try to open a position of that size, you’re in MARGIN trouble.

With a $1,000 account, you should be trading in micro-lots (0.01 lot), and in my view fewer than 10 micro-lots. That is, your position size should be less than 10,000 units of base currency – which basically means less than 10 times the size of your account. In other words, you should be using less than 10:1 actual leverage. Never mind that your broker allows you to trade with up to 50:1.

As a brand-new newbie, you should trade one micro-lot at a time – that’s actual leverage of 1:1 in a $1,000 account. The purpose of your practice on a demo account is NOT to see how much fake money you can make by scoring big wins with large positions. The purpose of your practice, at this stage, is to learn the nuts-and-bolts of forex trading, to learn the mechanics of your trading platform, to experiment with trading styles and trading strategies in order to find one (or more) that you feel confident pursuing, and to teach yourself to enter and exit trades without losing (fake) money.

That last objective is the most important one. It embodies all the elements of risk management and trade management.

You can do all of the above with almost any trading style, and almost any trading strategy, in an account of almost any size, so long as you keep your position sizes in line with your account balance.

Trading styles (in case you’re not familiar with the term) include scalping, intraday trading, swing trading, etc. And trading strategies include trend-trading, breakout trading, trading on news, trading on fundamentals, etc.

I would recommend that you NOT attempt scalping or position trading, and I would recommend that you NOT attempt to trade on news or on fundamentals – not because of your account size, but because you are new to this business.

So – long story short – get your position-sizing under control, and you will open up a whole range of choices regarding styles of trading, and trading strategies.

I hope you’re content with the way I have chosen to answer your question.

And I hope to see you around the forum in the future.

4 Likes
2

I would like to add to what Clint said. I feel it’s necessary to risk only what you could care less about losing. In fact, I want you to get very comfortable losing–losing when you do dumb things, losing when volatility is high, and even losing when it is not your fault. Yes, you must get very,very,very comfortable with losing trades. The only way to do that is to trade the "don’t-give-a-sh*t size position.

Yes, your broker will let you monkey around all you want with decreasing your leverage. But let’s get real here. As soon as you change your account leverage to 10:1, you are going to change it right back to default. Why? Because you can. And therein lies the problem. You have way to much power to instantly enter into a bad position. You have way too much power to over trade. You have way too much power to blow up your account.

People are going to disagree with me, but let them. Take that $1000 and put it back in the bank where it’s safe from all your “power.” Open a retail account where you can start with $50. How do you trade with that, you ask? Easy, most brokers have very small account minimums and you will be able to place ONE order risking ONE micro-lot for a MAJOR pair.

You place that order using the highest time frame chart that is practical for this trade. Forget all the crazy, lagging indicators and instead, focus on naked charts using pure price action. Learn how to read what price is telling you. Be guided by what the big institutions are doing, not what some pundit on the news is telling you. I tell all the new traders this: don’t worry about the news or fundamental analysis. It means nothing. The exception would be to get on the Marketplace.com site and check out the the upcoming major economic events. That way, you know when to stay out.

Best of luck on the charts.

1 Like
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Clint, could you clarify what you mean by actual leverage of 1:1? I’m not sure I understand how you can achieve that when the minimum leverage allowed by a broker might be 10:1, as in the case of Oanda. Am I wrong about that?

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[quote=“Clint, post:1, topic:112097, full:true”]
As a brand-new newbie, you should trade one micro-lot at a time – that’s actual leverage of 1:1 in a $1,000 account.[/quote]

[quote=“jcandan, post:3, topic:112097, full:true”]
Clint, could you clarify what you mean by actual leverage of 1:1? I’m not sure I understand how you can achieve that when the minimum leverage allowed by a broker might be 10:1, as in the case of Oanda. Am I wrong about that?[/quote]

I’m going to address the second part of your question first – the part about “minimum leverage”.

Brokers do not specify “minimum leverage allowed”. Brokers specify MAXIMUM leverage allowed.

You need to be clear on the difference between maximum allowable leverage and actual leverage used.

• Maximum allowable leverage: The limit specified in your platform

Every broker specifies an upper limit to the leverage that you may use.

In most jurisdictions, the local regulator establishes the retail leverage limit, and brokers typically impose that same limit on you. In some cases, however, a broker will impose a lower limit than the one dictated by the regulator. What a broker cannot do is impose a higher limit on you, than the maximum allowable leverage dictated by the regulator.

Example: In the U.S., the CFTC limits the leverage which retail brokers can offer to their customers to 50:1 on major pairs, and 20:1 on so-called exotic pairs. Let’s consider only the major pairs for convenience.

If you want to trade USD/JPY, for example, at a broker like Forex.com, the notional value of your trade may not exceed 50 times the equity in your account. So, if you have a $1,000 account (as in the example at the beginning of this thread), the notional value of your trade may not be larger than $50,000. In the case of the USD/JPY trade in this example, that means no larger than 5 mini-lots (or 50 micro-lots) of USD/JPY.

This maximum allowable leverage is like the credit-limit on your credit card: It’s the upper limit which you may not exceed. But, you don’t have to use all of it. In the case of retail forex leverage, you can use any amount of leverage up to, but not exceeding, the limit (50:1 in the example above).

Regarding your question about Oanda: In your Oanda platform, you are able to set your personal maximum allowable leverage to some level lower than the default level in the platform (which is the 50:1 leverage limit dictated by the regulator).

• Actual leverage used: The notional value of your trade ÷ your account balance

When you lower your personal leverage limit (say, to 10:1), you are not committing yourself to using 10:1 leverage in your trading. You are limiting yourself to actual leverage not exceeding 10:1.

If you open a 10-micro-lot USD/JPY trade in a $1,000 account, you would be using 10:1 actual leverage (because the notional value of that trade would be $10,000, which is 10 times the value of your account). 10:1 actual leverage would be right at the limit you have imposed on yourself, and doing so would be a very bad idea.

If you open a 5-micro-lot USD/JPY trade, you would be using 5:1 actual leverage, well below the 10:1 limit you have imposed on yourself.

And, if you open a 1-micro-lot USD/JPY trade, you would be using 1:1 actual leverage (which really means no leverage at all), because the notional value of your trade would be $1,000, which is the same as your account balance.

And that should answer the first part of your question.

Note: I have used USD/JPY for the examples above, because USD is the base currency in the pair, and we are assuming a USD-denominated account. In other words, the examples assume a base currency which matches the account currency.

When the base currency and the account currency are both USD, then 1,000 units of base currency has a notional value of $1,000; 2,000 units has a notional value of $2,000; and so forth. This avoids having to do currency conversions to determine notional values in terms of the account currency.

1 Like
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When I read that he is trading with 1/50 leverage that leads me to believe he may be trading with a U.S. Broker. That is the max leverage allowed since The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173, commonly referred to as Dodd–Frank) was signed into federal law by President Barack Obama on July 21, 2010. This rule also includes FIFO rules & no Hedging.

When he is trying to place a pending order both long & short at the same time on the same pair & it is rejecting it, that is more then likely due to the No Hedging Rule if in fact he is using a U.S. Broker. No Hedging = No Long & Short trade at the same time on the same pair.

7

Great point. I think the no hedging rule sucks. Thanks to good ol’ American over-regulation, I’m not allowed to protect myself when I am trading the daily bars and want to hold over the weekend. Instead of being able to just keep my position where it’s at, I have to figure out if it’s worth the risk of holding, or if I want to reduce my position size or just get out altogether. Life in the land of the free. Thanks for letting me vent.