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Choosing a Lot Size in Forex Trading
When you first get your feet wet with forex training, you’ll learn about trading lots. A lot references the smallest available trade size that you can place when trading currency pairs on the forex market. Typically, brokers will refer to lots by increments of 1,000, or a micro lot. It is important to note that the lot size directly impacts and indicates the amount of risk you’re taking.
Lot Size Matters
Finding the best lot size with a tool like a risk management calculator or something similar with a desired output can help you determine the best lot size based on your current trading account assets, whether you’re making a practice trade or trading live, as well as help you understand the amount you would like to risk.
The trading lot size directly impacts how much a market move affects your accounts. For example, a 100-pip move on a small trade will not be felt nearly as much as the same 100-pip move on a very large trade size.
You will come across different lot sizes in your trading career, and they can be explained with the help of a useful analogy borrowed from one of the most respected books in the trading business.
Trading With Micro Lots
Micro lots are the smallest tradable lot available to most brokers. A micro lot is a lot of 1,000 units of your account funding currency. If your account is funded in U.S. dollars, this means that a micro lot is $1,000 worth of the base currency you want to trade. If you are trading a dollar-based pair, 1 pip would be equal to 10 cents. Micro lots are very good for beginners that want to keep risk to a minimum while practicing their trading.
Moving up to Mini Lots
Before micro-lots, there were mini lots. A mini lot is 10,000 units of your account funding currency. If you are using a dollar-based account and trading a dollar-based pair, each pip in your trade would be worth about $1.00. If you are a beginner and you want to start trading using mini lots, make sure that you’re well-capitalized.
While $1.00 per pip seems like a small amount, in forex trading, the market can move 100 pips in a day, sometimes even in an hour. If the market is moving against you, that adds up to a $100 loss. It’s up to you to decide your ultimate risk tolerance. but to trade a mini account, you should start with at least $2,000 to be comfortable.
Using Standard Lots
A standard lot is a 100,000-unit lot. That is a $100,000 trade if you are trading in dollars. The average pip size for standard lots is $10 per pip. This is better remembered as a $100 loss when you are down just 10 pips. Standard lots are for institutional-sized accounts. That means you should have $25,000 or more to make trades with standard lots.
Most forex traders that you come across are going to be trading mini lots or micro-lots. It might not feel glamorous, but keeping your lot size within reason relative to your account size will help you preserve your trading capital to continue trading for the long term.
A Helpful Visualization
If you have had the pleasure of reading Mark Douglas’ Trading In The Zone, you may remember the analogy he provides to traders he has coached, which he shares in the book. In short, Douglas recommends likening the lot size that you trade and how market moves would affect you, to the amount of support you have under you while walking over a valley when something unexpected happens.
To illustrate this example, a very small trade size relative to your account capital would be like walking over a valley on a very wide, stable bridge where little would disturb you even if there was a storm or heavy rains. Now imagine that the larger the trade you place the smaller and riskier the support or bridge under you becomes.
When you place an extremely large trade size relative to your account balance, the bridge gets as narrow as a tightrope wire, such that any small movement in the market would be like a gust of wind in the example, and could send a trader the point of no return.
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The Minimum Capital Required to Start Day Trading Forex
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It’s easy to start day trading currencies because the foreign exchange (forex) market is one of the most accessible financial markets. Some forex brokers require a minimum initial deposit of only $50 to open an account and some accounts can be opened with an initial deposit of $0.
And unlike the stock market, for which the Securities and Exchange Commission requires day traders to maintain an account with $25,000 in assets, there is no legal minimum amount required for forex trading.
But just because you could start with as little as $50 doesn’t mean that’s the amount you should start with. You may want to consider some scenarios involving the potential risks and rewards of various investment amounts before determining how much money to put in your forex trading account.
Day traders shouldn’t risk more than 1% of their forex account on a single trade. You should make that a hard and fast rule. That means, if your account contains $1,000, then the most you’ll want to risk on a trade is $10. If your account contains $10,000, you shouldn’t risk more than $100 per trade.
Even great traders have strings of losses; if you keep the risk on each trade small, a losing streak can’t significantly deplete your capital. Risk is determined by the difference between your entry price and the price at which your stop-loss order goes into effect, multiplied by the position size and the pip value.
Pip Values and Trading Lots
The forex market moves in pips. Let’s say the euro-U.S. dollar (EUR/USD) currency pair is priced at 1.3025. That means the value of one euro, the first currency in the pair, which is known as the base currency, is $1.3025.
For most currency pairs, a pip is 0.0001, which is equivalent to 1/100th of a percent. If the EUR/USD price changes to 1.3026, that’s a one pip move. If it changes to 1.3125, that’s a 100 pip move. An exception to the pip value “rule” is made for the Japanese yen. A pip for currency pairs in which is the yen is the second currency—called the quote currency—is 0.01, which is equivalent to 1 percent.
Forex pairs trade in units of 1,000, 10,000 or 100,000, called micro, mini, and standard lots.
When USD is listed second in the pair, as in EUR/USD or AUD/USD (Australian dollar-U.S. dollar), and your account is funded with U.S. dollars, the value of the pip per type of lot is fixed. If you hold a micro lot of 1,000 units, each pip movement is worth $0.10. If you hold a mini lot of 10,000, then each pip move is $1. If you hold a standard lot of 100,000, then each pip move is $10. Pip values can vary by price and pair, so knowing the pip value of the pair you’re trading is critical in determining position size and risk.
When trading currencies, it’s important to enter a stop-loss order in case the value of the base currency goes in the opposite direction of your bet. A simple stop-loss order would be 10 pips below the current price when you expect the price to rise or 10 pips above the current price when you expect the price to fall.
$100 in the Account
Assume you open an account for $100. You will want to limit your risk on each trade to $1 (1% of $100).
If you place a trade in EUR/USD, buying or selling one micro lot, your stop-loss order must be within 10 pips of your entry price. Since each pip is worth $0.10, if your stop loss were 11 pips away, your risk would be $1.10 (11 x $0.10), which is more risk than you want.
You can see how opening an account with only $100 severely limits how you can trade. Also, if you are risking a very small dollar amount on each trade, by extension you’re going to be making only small gains when you bet correctly. To make bigger gains—and possibly derive a reasonable amount of income from your trading activity—you will require more capital.
$500 in the Account
Now assume you open an account with $500. You can risk up to $5 per trade and buy multiple lots. For example, you can set a stop loss 10 pips away from your entry price and buy five micro lots and still be within your risk limit (because 10 pips x $0.10 x 5 micro lots = $5 at risk).
Or if you choose to place a stop loss 25 pips away from the entry price, you can buy two micro lots to keep the risk on the trade below 1% of the account. You would buy only two micro lots because 25 pips x $0.10 x 2 micro lots = $5.
Starting with $500 will provide greater trading flexibility and produce more daily income than starting with $100. But most day traders will still be able to make only $5 to $15 per day off this amount with any regularity.
$5,000 in the Account
If you start with $5,000, you have even more flexibility and can trade mini lots as well as micro lots. If you buy the EUR/USD at 1.3025 and place a stop loss at 1.3017 (eight pips of risk), you could buy 6 mini lots and 2 micro lots.
Your maximum risk is $50 (1% of $5,000), and you can trade in mini lots because each pip is worth $1 and you’ve chosen an 8 pip stop-loss. Divide the risk ($50) by (8 pips x $1) to get 6.25 for the number of mini lots you could buy without exceeding your risk. You would break up 6.25 mini lots into 6 mini lots (6 x $1 x 8 pips = $48) and 2 micro lots (2 x $0.10 x 8 pips = $1.60), which puts a total of only $49.60 at risk.
With this amount of capital and the ability to risk $50 on each trade, the income potential moves up, and traders can potentially make $50 to $150 a day, or more, depending on their forex strategy.
Starting out with at least $500 gives you flexibility in how you can trade that an account with only $100 in it does not have. Starting with $5,000 or more is even better because it can help you produce a reasonable amount of income that will compensate you for the time you’re spending on trading.
Blueprint for Forex Day Trading with $1,000 (or less)
Here’s how to start building a small forex account using day trading, including what type of account to open, what time frame to focus on, strategies, and expectations.
Forex day trading with $1,000 (or less) is possible and even profitable. Forex trading allows you to control your position size precisely, and utilize leverage, both which aid a small trading account. We will discuss both these concepts a bit later on.
For the US stock market, you need a minimum of $25,000 to day trade. In the forex market, you can start trading with less than $1,000. That doesn’t mean you’ll be able to make a living off trading right away, but you can build your account by following proper risk management, using a low spread broker, and placing about 3 to 6 day trades in the span of a few hours. Here’s the blueprint for doing it.
To keep the article to a reasonable length, links are provided to articles or resources with more information on a given topic. Please read those as well to get a full grasp of the concepts.
Getting Setup in Forex- Account Type and Broker
If you’re trading with $1000 or less, trade through an ECN broker that offers a near-zero spread and low commissions.
Using an ECN broker means you can capitalize on short-term opportunities and still manage risk. An ECN broker allows you to buy and sell directly with the market (other traders and institutions). That translates to lower spreads, and you can instantly buy and sell whenever you like.
Non-ECN brokers typically charge larger spreads and are acting like a middle-man between you and the market. Orders may be slow to fill, and there may be limitations on where you’re allowed to place orders. For example, they may not let you place limit or stop orders within a few pips of the current price…because they want you to use market orders which give them discretion on which price to give you.
Limit, stop, and market orders are our three main order types as day traders. All three order types are fine when day trading (with a non-ECN broker), although we prefer using limit and stop orders as much as possible, and market orders only when we need to get in or out quickly and don’t have time to put out a limit or stop.
As a day trader, one of the most crucial factors is the spread you pay. It has to be low if you expect to succeed. During active times, such the US and London session, the spread is typically around 0.1 to 0.5 pips (less than half a pip) with an ECN broker.
Another crucial element is order speed. When you hit buy or sell you want to know that you will get into or out of that position instantly. If there is a time lag, that is a big concern because lags can cost us a lot of money in fast-moving markets.
When dealing with an account less than $10,000, and less than$1,000, make sure the broker offers micro lot trading, also referred to as “0.01 lots”. Micro lots give you the ability to really fine-tune your position size and risk on a small account. Currencies are traded in different unit sizes, and micro lots are the smallest one. If trading a $1,000 account, make sure the broker offer micro lots. For a more thorough introduction to forex, how prices move, lots sizes, and all that basic info you need to know before getting started, see Introduction to Forex.
Also, when setting up an account, request 30:1 leverage. You won’t need that much, but if you don’t need it you don’t have to use it. A little extra is ok. Leverage will be discussed more later on.
Day Trade Using the One-Minute Chart
Never risk more than 1% of capital on a single trade.
With a near zero spread, I can actively trade price moves that are about 8 to 25 pips from start to finish. I set a profit target of 6 to 10 pips (potential more on certain trades), and a stop loss of 4 pips (this may vary slightly by trade) and am able to trade those price waves you see on the 1-minute chart during the London or early US session (see How to Day Trade Forex in 2 Hours or Less for the strategy).
Volatility is always changing, which means how many pips are risked and captured also changes. Where stop losses and targets should be on a particular day/trade is addressed in the comprehensive forex article linked above.
If I trade on a 15-minute chart I may only get a couple trades in each day, and I need to spend most of my day watching to make 4% maximum (if I win two trades with a 2:1 reward:risk ratio). Now 4% is a great daily return, but that is the best case scenario (because you are risking 1% of your account per trade, if you make 2:1 on those trades, you are up 2% on each x 2 trades).
Now, check out a 1-minute chart in the EURUSD and you’ll notice multiple small trending moves during the London and early US session we can capitalize on (don’t trade around news, so ignore crazy big price bars which are typically news related).
Here’s a chart of the London session from April 27, 2020. While the pair only moved 30 pips during the entire session, there were multiple waves to trade. With stop losses of 3 to 5 pips on most of these trades–placed on the opposite side of the consolidation or engulfing pattern–all these trades would have hit a 1.5: or 1.6:1 target, and in several cases a 2:1 target.
Losing trades have an “x” with them, like the one on the far right where it is likely a short would have been taken, there was a bit of a pop higher stopping out the trade, and then the short trade would have been re-entered when the signal emerged again. Even with following the strategies and guidelines provided in the various articles that have been linked to in this article, it is likely most traders would no take all the exact same trades, as there is subjectivity involved in analyzing markets and determining which trades to take. The actual strategy is one thing, determining which trades to take is another, and for that velocity and magnitude is key. If you study the trades above and consider the velocity and magnitude of the price moves prior to the trade, why that trade was selected will start to make sense.
On a 1-minute chart you can make about 3 to 6 trades within a two to three hour period. Now assume you win all those, you’re looking at a 6% to 12% gain in a couple hours (assuming all winning trades, and a 2:1 reward:risk ratio).
It’s ridiculous to assume you’ll win all your trades and make 6% to 12% per day! You won’t, but your upside potential is greater by taking more trades on a shorter time frame.
Let’s quickly review what you need to do:
- ECN broker for day trading; the smaller the spread and the lower the commission the better.
- Broker must allow micro lot trading if you are using a $1,000 (or smaller) account. A micro lot is worth $0.10 per pip of movement, multiplied by how many micro lots you have in your position.
- Day trade the EURUSD, or possibly the GBPUSD if the EURUSD is too quiet.
- Day trade during the London or early US session.
- Trade the price waves on the one-minute chart.
- Only trade for two to three hours. That is more than enough and will typically produce about 4 to 6 trades.
- The most we lose on a trade is 1% of our account.
- For our 1% risk on a trade, we should be trying to make 1.5% to 2%
Forex Day Trading with 1000 dollars (or less) – Expectations
If you put in hard work on a demo account practicing the strategy, and risk less than 1% of your account on each trade, you can steadily grow a $1000 account day trading currencies.
The learning curve is steep. While trading sounds very easy, it isn’t. Even once you know a strategy, it typically takes most people at least six months to a year to get good enough at implementing it in all sorts of market conditions (conditions are different every day, as no two days are ever alike) where they start to develop some consistency.
Assume a winning percentage of 50% (you are winning 50 trades out of a 100), 4 trades a day, an average stop loss of 5 pips and an average target of 8 pips.
If you are forex day trading with $1000 for 20 days out of the month, and use a fixed position size of 20 micro lots, here’s what you can potentially make in a month:
[20 micro lots keeps risk below $10, which is 1% of a $1,000 account. 20 x $0.10 x 5 pips = $10 being risk per trade. Adjust position size according to account size and stop loss level. If a particular trade has an 8 pip stop loss, plug that into the formula and your position size will drop. If your account is only $500, then you can only risk $5 per trade. Plug that into the formula and as long as you know your stop loss you can always calculate your position size.]
20 days X 4 trades = 80 trades
50% of 80 trades are profitable = 40 winning trades and 40 losing trades
A winning trade is 8 pips (which is $0.80 per micro lot) X 20 micro lots = $16
A losing trade is 5 pips (which is $0.50 per micro lot) x 20 micro lots = $10
Winning trade total is 40 trades X $16 = $640
Losing trade total is 40 trades X $10 = -$400
Monthly profit (excluding commissions) is $640 – $400= $240
Total commissions are 80 trades X 20 mirco lots X $0.05 (round trip) = $80
Monthly profit (including commissions) is $240 – $80= $160, uncompounded.
That’s about 16% on the $1,000 account. Don’t expect to make that return right away. These numbers are meant to show the potential of a profitable system. Unfortunately, most traders end up losing.
As long as your risk is 1% per trade, you trade about 4 times a day, have a win rate of 50%+, and a reward to risk of 1.5:1 or greater (this example uses a 1.6: ratio), then it is possible to make returns like this. Even though each trade may be slightly different, as long as these types of stats are maintained, the profits will come.
Forex Day Trading with 1000 dollars: 16% per month?
16% per month may seem very high, and for most traders it is. Leverage is used extensively though. The account is only $1,000, but we are taking positions of $20,000 (the 20 micro lots). In other words, we are leveraged 20:1 to make these returns. If you think of it another way, leverage magnifies returns and losses. If we didn’t use leverage we would only make about 1%, but because of 20:1 leverage we make closer to 20%. So it is not magic, it is just leverage.
I have no problem with leverage because each trade has a stop loss on it and I never trade within 5 minutes of news releases. Therefore, while I may get some small slippage on the odd trade, it’s very unlikely the slippage is enough to hurt my trading day or account (but yes, it could happen). I also only day trade the EURUSD during the late London session or early US session when liquidity is at its peak. This helps reduce the risk of catastrophe.
Slippage is when the price changes so quickly that even if you have an order to get out of the trade you end with a bigger loss than expected…sometimes much bigger.
When you use leverage, you can lose everything, and even more money than you deposited, resulting in a debt to your broker. When you trade on leverage you are borrowing money to trade. If a big move happens, you may not be able to get out of your position. Examples of such events, that could have wiped out a leveraged day trader, include the GBP flash crash (one reason we don’t trade outside of high volume times) in October 2020, and the January 2020 CHF surge.
I also automatically place stop loss and target orders on every trade I get into, that way I know I have an exit plan for every trade.
Quick review of this section:
- We trade during the London or US session for about two hours on the one-minute chart.
- Volatility doesn’t really matter; when it is high our stop loss will be a bit bigger, but so will our target (our position size will be smaller). When volatility is low, our stop loss will be a bit smaller, but so will our target (our position size will be bigger).
- If you can make 4 to 6 trades a day, win 50% of the trades, and on average have wins about 1.5+ times bigger than the losses, then you will be building a solid forex income. Play with these numbers to see how different scenarios and strategies could play out.
- It seems easy; it isn’t. It takes a lot of practice and time to get to this level.
- With leverage, it is possible you could experience a catastrophic loss.
Forex Day Trading with 1000 dollars (Or Less) – Final Word
It is unlikely most traders will ever reach a level where they can make 20% per month (even with leverage), even though the simple math here makes it look easy. Yet it is possible to start building a forex income, even on $1,000. Try to work up to those statistics. Even if you get close, you can start building your account up.
These types of returns require leverage, and leverage has its own dangers and rewards. It is possible to lose more than you deposited when using leverage, so don’t hold positions right around news, trade only during active hours, use stop loss orders, stick to the EURUSD or GBPUSD, and keep risk to less than 1% of the account on each trade.
That’s the way to grow an account and see good monthly returns.
For more on day and swing trading forex, see my Forex Strategies Guide for Day and Swing Traders.
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