That's right many of you have seen them, the 1, 25, 50, 100 and even the 500 USD Forex accounts, many of you may have even opened one too. But how many of you have been successful at trading those accounts? My guess is; none!
You see, forex is a highly leveraged trading technique. This means that the broker will allow you to trade as much as 500 times your deposit! This makes your chances of losing 500 times greater. But why should the broker care if you lose? They make money either way.
But lets talk about why these small accounts don't succeed.
It's in the Margin
Ever heard of the 'margin call'? This is when the broker tells you that you don't have enough money in your account to sustain a losing trade. I'll explain. If you have 500 USD in your trading account, and you are trading with 200 USD times the leverage i.e. 200 x 500 = 100,000, you are left with a margin of 300 USD. At these levels each pip is approximately 10 USD. This means that you have a margin of 30 pips (300/10 USD = 30 pips) to buffer your losing trades. As soon as your losing trades equal 250 USD the broker will send you a 'margin call' asking you to fund your account to cover the losing trades because the mandatory 50 percent (in this case 250 USD) of your deposit has covered the losing trade.
However, since the market moves in seconds, you will not have the time to fund the account and the system will automatically close out your trade to 'protect' your margin. Nevertheless, you lose 250 USD or more.
Given that the market moves as much as 120 pips in either direction most of the time, it only pays to have as much as 200 pips (or more) worth of margin in your account. If you are trading with a lot size where 1 pip equals 1 USD (0.10 lot; 20x500=10,000 USD) you should have 200 USD in your account. If you want to trade 1 pip = 1 USD with 200 pips in your margin you should have 220 USS in your account. 200 USD as margin and 20x500=10,000 is what you trade with.
This way, trading with a consistent strategy, you will have 200 pips leeway even if the market goes against you. I have noticed that the market returns to a certain average value over a period of 2 to 3 days. So, if you go in a loss and you have enough 'margin' to prevent a margin call, you will eventually make a profit in 3 to 4 days. You just have to wait it out.
Now you know why small dollar accounts don't survive. My advice is to start with USD 1000 and trade 100x500 = 5 USD per pip, keeping 180 pips in reserve to prevent 'margin calls.'
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