Wednesday, April 7, 2010

Trading from Small Amount : Brokers with Low Contract Sizes

Many people want to start forex trading but they do not want to risk large amounts of money. Most brokers offer accounts from very small or no minimum deposits but what people don't realize is that they are risking a very large percentage of their money per trade due to the fact that the broker has a high minimum tradable amount per pip. People don't realize that most broker call their accounts mini or micro in virtue of their minimum tradable lot size (0.1, 0.01, etc) but not in virtue of their contract size per standard lot which is what finally determines the amount of money made or lost per trade. The best accounts a person can use to trade with small amounts of money and accurately handle their lot sizing to risk reasonable percentages of equity are accounts which offer a 10,000 USD (instead of the regular 100K) contract size per standard lot. In today's post I will talk a little bit about the brokers which offer these accounts (which are hard to find !) and their different disadvantages/advantages.

So what is the advantage of a 10,000 USD contract size per standard lot ? On regular accounts offered by most brokers, the contract size per standard lot is 100,000 USD, meaning that even if you can trade down to 0.01 lots you will be trading at least 1000 units of base currency which are equivalente to roughly 10 cents per pip on the EUR/USD. What this means is that if you have a small deposit (100 USD for example) you will have to trade with an SL of less than 20 pips to maintain your risk low. This leaves almost no room for money management adjustements and drastically limits the amount of money you can trade and the positions you can take. For this reason a regular forex account needs to be opened with at least 1000 USD so that money management can be done appropiately and positions with large SL values (up to 200) can be traded.

What is the solution for the really small investor ? If you are just starting to trade or you want to test a large array of trading systems, etc, then the best solution is to use an account with a 10,000 USD contract size. This means that you can trade 100 units of base currency at 0.01 lots, meaning that you can trade 100 USD and have a stop loss value of up to 200 pips without risking more than 2%. This is great in the sense that it allows you to mimic the money management conditions of a 1000 USD accounts with 1/10th of the starting capital.

But who offers these elusive accounts ? It has taken me many hours of internet searching to come up with companies which offer accounts that allow you to trade from 1 cent per pip but I have compiled a list of these companies to make everyone's life a little bit easier :o). The brokers which allow these accounts are : IBFX, FXclearing, LiteFX, NordFX, MasterForex, InstaForex and FXopen.

They all have advantages and disadvantages, for example, IBFX is the only of these that is NFA registered and therefore it offers you all the pros and cons of this feature. InterbankFX allows credit card and bank wire deposits but it lacks any form of e-currency payments, something which I don't like since it is fairly inconvenient. Definitely my favorite is FXClearing in the sense that it offers paypal deposits/withdrawals something which is extremely convenient when dealing with these small amounts of money. The other companies listed above also offer additional payments through other e-currencies like egold, liberty reserve, etc. However the fact that I like the most about them is that all of them (LiteFX, NordFX, MasterForex, Instaforex) offer the ability to deposit funds using alertpay, something which is convenient since you can easily transfer money from your bank account to your alertpay account (exactly like when using paypal). By the way, all the above companies offer metatrader 4 as a trading platform something which is important to most people since this is the leading platform used for automated trading.

By using any of the above companies you can open accounts with small investments and yet be able to trade your systems in an accurate fashion, these allows for a reduced-risk evaluation of your automated or manual trading systems, a very important thing that must be done if one then wishes to invest (or manage) large sums of money in forex trading. If you know any other broker which offers metatrader 4 and trading from 1 cent per pip, please leave a comment :o) (also make sure you leave any comments about the above brokers if you have experience with them)

If you would like to learn more about my automated trading systems and how you too can be successful in forex automated trading with realistic risk and profit targets please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !


CAVA said...

Thanks for this great post, it is really of great help for new traders. One question; for a 150 USD account, what is the right order size? My tests have shown that orders of 3000 USD give the chance of good Stops and good Limits. Is that correct? Thanks.

Daniel said...

Hello Cava,

Thank you for your comment :o) The order size depends on your stop loss since this determines the amount of pips you are risking. A 3000 USD order size means that you will be risking 30 cents per pip so for a 150 USD account you wouldn't want to have a stoploss larger than 10 pips for a 2% risk. Overall this order size is unfit for most trading strategies which require larger stop loss sizes. However on a cent account (the ones mentioned in the post) you are able to trade from a 100 USD contract size which means you will be able to trade with a SL of up to 300 pips before risking 2%.

I hope this answers your inquiry. Thanks again for your comment :o)

Best Regards,

Daniel Fernandez

CAVA said...

Daniel. Thanks for your detailed answer. Yes, my question was related to these small accounts, thanks. I've been doing some research on IBFX and found some bad comments about it and even an old process from the regulatory agencies in the US. It seems that some of the companies offering these small accounts are also small companies which don't offer "No dealing Desk" and sometimes they increase the spread or affect the clients with requotes and other practices. I will try to do the same research with the other companies you mentioned. Thanks again.

Jacob said...

hi daniel,
go markets australia offer nano-lots as well. they call this "L-plate" accounts;-)
Thanks for an interesting blog.

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