Forex Trading - An Excellent Trading Education

by Rick Ratchford

Back in the day, those starting out trading in the Futures and Commodities markets had to make a choice; either we start off trading regular sized futures and commodity contracts, or look to trade the Mid-American exchanges and their pint size contracts.

When starting out in trading, risk of loss looms large. Most traders start out with accounts that cannot take too many losses before getting pushed out the door. Yet, most will continue to trade the regular size contracts because those markets offer much greater liquidity than their smaller cousins. Liquidity is very important, as it allows for greater assurance that if your price is hit, that is the price that you will be able to enter or exit. A market lacking liquidity often has the worse fills called "slippage". And of course, more liquidity means more traders means more price action, etc.

Today, more people have access to the ultra-large and liquid Forex markets than ever before. What used to be the exclusive club for large banks and monetary institutions is now assessible to anyone, anywhere. All you need is an account and internet access.

But accessing these markets is more than just having more choices for currency trading, which is what the Forex markets are (short for Foreign-Exhange). The Forex markets offers trading 24 hours a day from Sunday afternoon to Friday afternoon (as viewed from the US). And what is truly an opportunity for new traders today is an opportunity to trade contract sizes that is just a 10th of the full size contract.

For years traders have been taught to start off paper trading before using real money. While this helps with the mechanics of trading, it does little in the way of preparing the trader for the real difficult task associated with trading; the psychology of trading with real money.

Trading successfully requires being indifferent to how the market behaves. The trader must learn to accept whatever the market dishes out and not take it personally when losses occur. Also, the trader must learn to avoid any feelings of invincibility in the event he hits a few winners early on. Fear and greed is usually found at the center of all unsuccessful traders that eventually are forced out due to heavy losses to capital or emotions.

Traders still working towards trading with any consistency, confidence and poise can find great benefit in opening a forex account and selecting what some forex houses call their "mini" account. With the mini-account, the trader has a choice as to whether to trade the full contract size (100,000) or some multiple of 10,000. Having this flexibility allows the new trader to trade with real money while being able to survive many losses without the devasting results that would have come from trading the full size values.

For example, suppose that you have analyzed the AUD/USD market and have determined what price you will buy at. Also, you have noted that in order to have your stop-loss placed just before a previous swing or pivot bottom that you expect to hold, it would require a risk of about 85 pips (pips in forex are like ticks in futures and stocks).

If you were to trade the usual full contract size, your risk exposure would be at least $850 for a single trade. This is a bit much for a small account especially if the trader is a beginner. By trading only 10,000 rather than 100,000 (1/10th), the risk is only $85! The trader can actually lose ten trades in a row of the same risk size (in pips) in what one loss in the full size would have provided. Although losing 10 in a row is highly unlikely, the idea here is that it gives the new trader greater staying power.

No matter whether you trade a pip size of 100,000 ($10 per pip) or 10,000 ($1 per pip), the trader will be trading real money and thus can start adding to his experience of doing so, with all the pros and cons that go with it. Once the technique appears to be paying off and the trader has learned not to be emotionally attached to each trade, the size can then be increased gradually over time (but never within the same trade).

One of the major problems found with many traders is that of overconfidence and greed. When trading a small pip size, the trader must be careful not to get too cocky when he starts to win more trades and his account size is growing, although slowly due to the small pip size. Some traders start to get impatient, thinking that if they had only traded larger pip sizes that they would have made an incredible amount of money. But since they are only trading small pip sizes,their account is only 1/10th larger than it could have been. This "big eyes" syndrome can cause the trader to decide on bumping up the pip size too early in his development as a trader, often resulting in an increase in fear (of losing all that money in a single trade) which often results in not thinking clearly during the trade. The trader can start reasoning away moves going against his position, and eventually resulting in wiping out the whole account. It has happened to so many so often.

So if you are new to trading or are still trying to master the technical and emotional elements towards consistency in winning, consider opening a forex account and simply trading small pip sizes. Where you might have felt too much pressure taking risks above $500 a contract for any single trade, you will likely feel very little or any pressure at all managing just 1/10th that risk. Yes, making money will come in 1/10th sizes also, but a profit is a profit. You want to be consistent in making profits over time and making sure you have your emotions in check. You want to make sure you are not going to become too aggressive on any trade, thinking you have found a sure thing (no such thing). Trade EVERY trade the same way, with a well thought out plan for entry, stop-loss and adding of additional contracts if applicable (of equal pip sizes). Making trading plans after the trade is in play is not the way to go, even with small pip sizes.

Trading with a mini-forex account may just be what you need to work out all the kinks in your trading armor and to reach that happy place of emotional and technical trading control.