Controlling risk

Today's online Forex brokers lets you open up an account with as little as $250, this is not necessarily a bad idea in most cases, take advantage of it either for practice or to minimize capital exposure. Putting in $250 is actually your first line of defense and a good way to control risk as this limits the potential of your stops from not getting executed. That is, if the amount of money you're willing to lose on a trade is $200 and the margin required is $50 then having only $250 on your account would limit huge losses in an event of a 400+ pip whipsaw that occurs once in a blue moon when liquidity is rough. During this scenario, prices could drop or rise really fast and swift that your limit or stop loss couldn't be filled and thus eating away more of your trading capital.
Lets put it this way, you have $100,000 trading capital on a standard account.
You plan on going long trading 10 lots of EUR/USD currency pair at 1.3500. Your target profit is 1.3650 for a total of 150 pips. You set your stop at 1.3440 at 60 pips. Trading 10 lots requires a margin of $7,000 plus the risk value of 60 pips = $6,000 since trading 10 lots on a standard account has a pip value of $100.


Instead of depositing your entire $100,000 with the broker, you decided to just put the required margin and risk amount totaling to $15,000 US dollars. You bought the EUR/USD pair, and after 2 days bad news hits the market that caused the pair to drop from 1.3500 to 1.3200 in the blink of an eye. Automatically, you lost that $15,000 right away but because you didn't put your entire trading capital in the account, this prevented unwanted loss due to a huge stop loss slippage from that abrupt price swing. 1.3500 to 1.3200 is a 300 pip drop, at $100 per pip its value is $30,000. That could've cost you $30,000 out of your $100,000 capital instead of just risking $15,000 because the stop loss couldn't be filled.

Looking at a smaller scale, if you got $8,000 trading capital on a mini account and you determined the amount you're risking for a trade say, $70 for margin and $200 risk or 200 pips on a single lot. Depositing that exact amount of $270 for that trade should be a good way to avoid violent price swings. If a bigger lot is desired that requires $500 for margin and $700 to run down risk then its ok to deposit $1,200 instead of your entire $15,000 capital.


 


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