Forex AND Stock Trading Strategies Blog

John Chen, the developer of the Trend Trading Blueprint that makes 600-900 pips per week: OK, I've been through this enough times to know what's going to happen...There are only six hours to go until I raise the  price for Trend Trading Blueprint. Lots of people will rush in during the last hour and secure a spot. That part is just like clockwork.

That's fine. I often procrastinate myself. But the next part is just as inevitable - a lot of people will get shut out when the price jumps up -- a lot. They won't be happy. In fact, a bunch of them will be really upset and send me angry emails. But they won't be able to say I didn't warn them.

And soon, hundreds of Trend Trading students will be masterfully placing their first profitable trades. And when the pips start pouring in, they'll be thinking one thing:

"Man, that Trend Trading Blueprint was the best investment I ever made."

Are you going to be one of them?

Rule #2 – Never Trade with a Float that’s Too Small

The rule about deciding on a trading float is simply that you shouldn’t start a live account without enough money to decently manage that account. Just because your broker says you can start a mini-account with a $200 deposit, and trade with a 500:1 leverage, doesn’t mean that you should.

With too little money you will be limited in the trading systems that you can use, and you won’t be able to follow a decent money management system. Again it’s about allowing yourself time to learn and grow. With too small of an amount to start out, your first few mistakes you make will erase your account and you’ll be more likely to give up before you ever learn how to truly earn in the Forex markets.

There are really no hard-and-fast rules here. For a mini account with 200:1 leverage, $10,000 would be a decent minimum to start.

For a real Forex account, I wouldn’t start with anything less than $50,000. Keep in mind that those are the smallest amounts that I would use. If you can afford to start out with more, you should!

Let’s discuss leverage for a moment to gain a better understanding in this area.


Bringing Leverage Into the Picture


Almost all Forex traders employ leveraging when they trade. Unless you’re a big bank or a big business, with millions to put on the line, leverage is simply a fact of trading. Most new traders won’t have millions they can afford to lose. So, they employ leveraging to allow them to trade at all.

To clarify what leverage is let’s just talk about a trade with one lot in the Forex market.

We know that one lot of currency is worth $100,000. To trade that lot at 1:1 (with no) leverage you would need to put $100,000 on the line until you closed the trade.

On the other hand, if you were trading with a 100:1 leverage, it means that your Forex broker will trade that $100,000 of currency if you only put 1% of the money on the line.

In other words, with $1,000 you now have the power to trade that same $100,000 lot.

Let’s assume our 1 lot trade was a winning trade, and we earned 100 pips by the time we closed that trade. To keep things simple we will say that 1 pip is worth $10.

On the 1:1 trade we made $1000. On the 100:1 trade we also made $1000. The difference in this case is the amount of money we had to invest to earn that money.

$1000 is 0.01 (or 1%) of $100,000. From an investment standpoint we could have earned more money with a low-interest savings account. With the leveraged trade though, $1000 is 100% of $1000. In that case we are actually earning some money.

Leverage allows us to earn more money while only investing a smaller amount. It’s simple right?

The power of leveraging is what makes Forex attractive to so many people. With a small amount to start out they are able to trade large amounts of currency and profit as though they had the full amount on the line. The problem is that, along with huge profits, leveraging can also equate to huge losses.

If the 1 lot trade we used in the example had been a losing trade (and we lost the same 100 pips) we would have erased our $1,000 in just one trade.

It’s very important to keep potential losses in mind when chosing a broker and the leverage that they allow for. There are now Forex brokers offering 400:1 or even 500:1 leverage. This does allow for traders to move huge amount of currencies with very little money invested, but it also greatly increases the risk involved.

The biggest problem with huge leverages is that it often attracts newer traders with smaller amounts of money to start out. Just because you can start an account with $5,000 and use 500:1 leverage to trade full lots with only $200 invested for each lot doesn’t mean that it’s a good idea.

In the long run you will be much better off with a 100:1 or 50:1 leverage and a larger amount of money to work with.

At the very most, you should never trade with anything over 200:1 leverage.

To calculate how much money you can trade with any given leverage you can use this simple calculation.

1/leverage = % x lot size = amount of money you need to trade one lot.

As an example if I was using a 200:1 Leverage and wanted to trade 1 lot ($100,000 of the currency pair)

1/200 = 0.005 or ½%

100,000 x .005 = $500

I would need $500 on the line for each lot that I traded. By now you should have a clear understanding of what a trading float is, and also of how leverage works to affect the amount you can trade with that float.

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