Now before you start dreaming of making billions with a micro account, you should remember that it takes money to make money. Not only does this cover the actual balance you will deposit with your broker, but this should also cover expenses for trading education, software, and tools.

There are several forex websites that offer free education though so beginner traders can be able to understand the basics without having to cough up a large sum of money. Others prefer to undergo coaching or a mentorship program in order to have a seasoned trader to guide them through the process and give advice on trades taken.

Most forex trading platforms already contain charts and the technical indicators, as well as a reliable economic calendar, yet some traders opt to subscribe to live market updates or invest in a more stable charting platform. Again, these depend on your preferences and how much you are willing to spend in your trading endeavor, although some free resources offer just about the same level of quality.

As for the actual trading capital, many recommend starting with an amount that you won’t mind losing. Of course this is not to foretell that you will lose all your trading capital at the beginning, but it doesn’t hurt to be prepared for the worst-case scenario. Besides, you should be trading an amount that you are comfortable with in order to prevent emotions such as the fear of losing from crippling you in your trade decisions.

Take note though that as some businesses fail due to undercapitalization, the same principle applies in forex trading. If you are not ready to risk real money on a live account just yet, you would be better off trading with a demo account first. Although this does not completely replicate the experience of trading live, this gives you the chance to build and refine your skills with no monetary risk at all. Once you are able to chalk up consistent returns, then you can be able to trade a live account from a much more knowledgeable position.

The post Does capitalization really matter? first appeared on IC Markets | Official Blog.

Traders typically look at drawdown as a percentage of one’s account balance. For instance, when you lose five trades in a row at 1% risk per trade, your drawdown is 5%.

Aside from looking at one’s profit and loss in pips or percentages, drawdown also plays a key role in managing risk. This allows you to determine how much of your account you can stand to lose before being able to recover and land back in the green.

 The truth is that traders will have their bad days every now and then, and it’s not surprising if one undergoes a terrible losing streak. What’s important is that you are able to manage your risk per trade and that you improve the expectancy on your trades such that a good winning trade can allow you to bounce back from most, if not all, of those losses.

For example, if you start with a $10,000 initial account balance and risk 10% per trade. If you undergo a losing streak of five consecutive trades, you will wind up losing half your account in just a few trades! You would need a really good winning trade or a set of profitable ones just to be able to make that amount back.

On the other hand, if you control your risk to just 2% per trade, undergoing a losing streak of five consecutive trades will just give you a manageable drawdown of 10%. If you are able to win a couple of 2-to-1 return-on-risk trades, then you will come close to recovering that drawdown in no time. As you’ve probably noticed, the reward ratio also plays a key role in determining how you can recover from drawdown.

This is a part of one’s trading plan that must be developed based on risk preferences and trading styles. For instance, if you are a swing trader that prefers holding on to trades for days and keeping wide stops, you can afford to risk a full position size on a single trade or divided among a few trades. If you are a scalp trader that opens and closes multiple positions in minutes, you can risk small for each trade then just go for large reward-to-risk ratios in order to bounce back quickly from tiny losses.

At the end of the day, what matters is that you setup your risk management rules such that you can afford to trade again and hold on to most of your account even with a losing streak or a large drawdown. Of course it’s also important to do your homework and improve the probability of winning by conducting thorough fundamental and technical analysis.

The post Understanding drawdown first appeared on IC Markets | Official Blog.

Reward-to-risk or return-or-risk refers to the ratio of the potential win on one’s trade compared to the predetermined maximum loss. This is typically calculated based on the number of pips for one’s profit target divided by the number of pips for one’s stop loss.

For example, if you are going long GBP/USD at 1.7000 with a 100-pip stop and a profit target at 1.7300, your reward-to-risk ratio on this trade is 3:1. If you are shorting USD/JPY at 100.00 with a stop at 100.50 and a profit target at 95.00, your return-on-risk for this trade is 10:1.

Regardless of how much of your account your risk on a particular trade, the reward-to-risk is always based on the ratio of the profit target to your stop loss. Even if you risk 0.25% on a short USD/JPY trade at 100.00 or 1% of your account, if your stop is at 101.00 and your target is at 96.00, your reward-to-risk for both scenarios is 4:1.

It is important to pay attention to your reward-to-risk when taking trade setups to ensure that your winners are larger than your losing trades. It is generally recommended that trades must have at least 1:1 reward-to-risk. For some traders, they prefer taking trades that are at least 2:1 to make sure that they can make up for consecutive losing trades with fewer winning trades.

Another important aspect of risk management is the win ratio. This refers to the percentage of winning trades among all trades taken. For example, if you were able to take a total of 100 trades and won 60 of them, your win ratio or percentage is 60%.

Improving one’s win ratio involves conducting fundamental and technical analysis in order to determine which setups have a higher probability of turning out to be winners. This also requires consistency and proper execution of your trade plans. Combined with decent reward-to-risk ratios of at least 1:1 on each trade, you can be able to maximize your profitability in the longer run.

This is where the concept of expectancy comes in. Having a high win ratio doesn’t necessarily guarantee longer-term trading success if your winning trades are often much smaller than your losing trades. An 80% win ratio isn’t a guarantee of consistent profitability if your average win is at $10 while your average loss is at $200.

Expectancy takes into account your average reward-to-risk on your trades and juxtaposes it with your win ratio. In other words, it gives you an amount you stand to gain or lose for each dollar of risk. This is calculated by taking the product of your average winning trade and your win ratio then subtracting the product of your average losing trade and your probability of losing.

With a positive expectancy, you are able to add gradually to your account in the long run. With a negative expectancy, you wind up gradually depleting your account.

For instance, if a trader has a win ratio of 40% with an average win of $250 and an average loss of $100, the expectancy is $40. This means that he is able to add an average of $40 to his account for every trade taken.

On the other hand, if a trader has a win ratio of 60% with an average win of $100 and an average loss of $200, then his expectancy is -$20. This means that he is actually subtracting an average of $20 from his account for every trade taken.

The post Reward-to-risk, Win Ratio, and Expectancy first appeared on IC Markets | Official Blog.

A forex broker that offers 50-to-1 leverage can allow a client to trade contract sizes of up to $50,000 for an initial capital of $1,000. A broker with 100:1 leverage can enable a trader with a $100 margin deposit to trade $10,000 worth of currencies.

While this sounds very appealing when profit scenarios are considered, bear in mind that leverage can also blow up one’s account in an instant when risk isn’t managed properly. In order to take advantage of the leverage offered by brokers, you need to allot part of your account to a margin deposit.

As leverage can compound your wins, it can also magnify your losses. This is why traders often call leverage as a double-edged sword or a two-way street. Some beginner traders are often blown out of the water at the start of their trading endeavor due to overleveraging or not completely understanding how to manage leverage or risk.

As mentioned earlier, margin refers to the “good faith” deposit placed with a broker to be able to trade a larger position and have the broker “borrow” the remaining balance. The broker usually pools these margin deposits with that of other traders in order to place its own margin under interbank trade transactions.

While leverage is often measured as a ratio of the amount that can be traded to the amount deposited, margin is measured in percentage terms. When the leverage is 100:1, the margin is 1%. When the leverage is 10:1, the margin is 10%.

These are some of the factors that are taken into consideration by most traders before opening an account with a broker. More seasoned traders and aggressive ones are more comfortable with a larger leverage, as this could allow them to boost their profit potential on their tried-and-tested trade strategies. Those who are just starting out or more conservative traders tend to go for brokers with lower leverage.

Margin is not to be confused with account margin, which refers to the total amount of money you have in your trading account. Used margin, meanwhile, stands for the amount of money that the broker is currently holding in order for you to be able to keep your trade positions open. The broker credits this amount back to your account when you close your position or undergo a margin call, a concept that will be discussed in the next section.

The post What is leverage all about? first appeared on IC Markets | Official Blog.

Let’s say you have a balance of $10,000, which is initially equal to your equity and usable margin. Without taking any trades yet, your used margin is equal to $0.00. In the course of taking trades, your used margin will vary depending on how much you risk on the trade and your account leverage, but you will not have a margin call for as long as you equity is greater than your used margin.

Once your equity falls below your used margin, your broker will give you a margin call, which basically means that you have to put in more cash to sustain your positions or close your account altogether.

In a trade example, let’s say your broker has a 1% margin requirement and you trade 1 lot of EUR/USD. Since you have a mini account, your used margin or margin required is $100 per lot. With that, usable margin is now at $10,000 minus $100 or $9,900 and used margin is at $100.

If you buy 80 lots of EUR/USD, you would wind up with a used margin of $100 multiplied by 80 lots or $8,000. That way, your usable margin is now at $10,000 minus $8,000, which is $2,000.

If price doesn’t go in the direction of your trade, you could encounter a margin call once price goes 25 pips against you. This is because your used margin of $8,000 at $100 per lot means that for every pip of movement in EUR/USD translates to $80 in profit or loss. With $2,000 in usable margin, a 25-pip move against you or 25 multiplied by $80 could wipe out your usable margin.

When that margin call happens, you would be out of the trade and take the $2,000 loss on your account. Once the trade is closed, your equity and balance will be at $8,000 for a total loss of 20% on your account.

Bear in mind that EUR/USD can move by as much as 50 pips per day so there’s a good chance that risking a large chunk of your account with a tight limit for encountering a margin call is almost guaranteed to lead to a loss.

Another factor you have to consider when avoiding margin calls is the spread offered by the broker. So if the spread on EUR/USD is at 2 pips, then price only has 25 pips minus 2 pips in leeway before resulting to a margin call in the previous example.

When you open an account with a forex broker, you should make sure that you read the fine print concerning leverage and margin. Bear in mind that your open positions could be liquidated by the broker when your used margin exceeds your equity so you should be fully aware of how these situations are handled, depending on the terms and conditions of opening a trading account.

Another way to avoid the dreaded margin call is to make sure that you make use of stop losses when you set your trades up. You should determine a line in the sand wherein your trade will be invalidated, and base your position risk on that value. This will be discussed in the succeeding sections.

The post Leverage and Margin Calls first appeared on IC Markets | Official Blog.

These calculations will be discussed in a latter section. For now, let’s take a look at the different methods in which you can determine your stop loss.

One common kind of stop loss is the equity stop. This is also known as a percentage stop because it is determined as a part of the trader’s account that he or she is comfortable with losing in case price action doesn’t go in the trade’s favor. This percentage value can vary from one trader to another, as this depends on the risk profile.

More aggressive traders can be comfortable with risking 10% of the account in a single trade while conservative ones might rather stick to 1% to 2% risk per trade. This value can also depend on the trader’s confidence in a particular trade. Some traders risk a smaller amount of their account on countertrend setups while risking twice as much on trend-following setups since these might have a higher probability of winning.

Another kind of stop is the chart stop, which is commonly used by traders who look at technicals. This is based on price action and where the trader thinks that the trade idea will be invalidated.

For instance, if you are making a trade based on a trend line bounce, then you could set a chart stop below the trend line. Once that support area breaks, you can be sure that the uptrend is already invalid and that you need to get out of your trade. By setting a chart stop, the order will automatically be triggered even if you’re not in front of your platform at that time.

If you are making a short trade based on a breakout, then you can set a stop loss above that support zone you thought would be broken. If you are making a long trade based on a breakout, you can have a stop below the resistance area you think might break.

The volatility stop is another kind of stop that is usually taken by more advanced traders. This takes into account how much a currency pair usually moves per day and sets a stop loss in pips based on that amount.

For instance, EUR/USD can move at an average of 100 pips each day so you can set a 100-pip stop loss from your entry, knowing that price doesn’t usually go beyond that pip movement in a day. Technical indicators, such as Bollinger bands, can also take price volatility into account and these can be used to set volatility stops as well.

Lastly, the time stop can also come in handy, especially if you are a longer-term trader. This basically sets a limit on how long you plan to keep your trade open. If price is not moving in the direction you thought it would given the time limit you set, then you might be better off closing that trade and using your trading capital in another trade.

The post Different Kinds of Stop Losses first appeared on IC Markets | Official Blog.

One of the most common mistakes beginners make in setting stop losses is placing them too tight. Of course the fear of losing is still very much present among beginner traders or those who are just transitioning from demo to live trading, and it’s no surprise when some are guilty of putting their stop losses too close to their entry levels.

While this seems to minimize losses in case the trade doesn’t go in your favor, you also expose your trade to the possibility of getting wiped out right away before price even gains traction and eventually heads the way you thought it would. Bear in mind that price action for some currency pairs, such as GBP/USD or GBP/JPY, are usually more volatile than others so there’s a chance that price could spike around first before picking a clearer direction.

Some traders opt to use a combination of a volatility and chart stop in order to avoid setting stops that are too tight. This comes in handy when trading currency crosses, which tend to be more volatile compared to major pairs. You can take into account the pair’s average daily range or average weekly range in ensuring that your chart stops are beyond those pip amounts.

On the flip side, setting stops that are too wide is also another common mistake. While this ensures that the stop loss isn’t likely to get hit anytime soon, this can lead you to trade position sizes that are too small and not be able to make the most out of your trade. In addition, this could lead to a small reward-to-risk ratio and negatively influence your trade expectancy.

Another common mistake in setting stops is using the position size as basis for stop losses. In fact, it should be the other way around, as the position size should be based on the stop loss and percentage risk per trade.

When you use the position size as the basis for calculating your stop, you are not able to take price action into account. Using a combination of an equity stop and a chart stop can be better for risk management if these elements are used as inputs in calculating your position size. This means that the number of lots you trade will be adjusted based on how much you are willing to risk and at which point you think the trade will be invalidated.

Perhaps one of the more overlooked stop loss mistakes is setting them right exactly on inflection points. Bear in mind that price could still have a chance at making a turn and heading in your direction upon testing support or resistance levels so it might be good practice to set a stop that’s a few pips beyond these levels.

The post Common Mistakes in Setting Stops first appeared on IC Markets | Official Blog.

Proper position sizing allows the trader to have just the right number of lots based on how much of the account he or she is willing to risk per trade and on the size of the stop based on past price action and volatility.

In order to calculate the right position size for each trade, one needs the following inputs: account balance, pip value of the pair you are trading, percentage of your account balance that you are willing to risk, and the stop loss in pips.

The calculation is simple when your account is denominated in the same currency as the counter currency of the pair you are trading. For example, this means having your account denominated in dollars when trading EUR/USD or GBP/USD. The calculation is also simpler if you have a GBP-denominated account and you are trading EUR/GBP.

In this case, you simply have to calculate the monetary value of your risk on the trade, based on the percentage risk and your current account balance. If you have a $10,000 account and you’d like to risk 1%, then the monetary value of your risk is $100.

From there, you divide the amount risked by the number of pips. If you are trading EUR/USD with a hundred-pip stop, then the amount risked per pip is $100 divided by 100 pips or $1/pip. After getting this figure, you then multiply it by the unit-to-pip value of the currency pair you are trading to get the position size.

There are additional steps involved when your account currency is different from the counter currency. However, you can always make use of pip value or position size calculators available on most trading platforms or educational websites.

What’s important is that you use the percentage risk and chart stop as inputs to generate the position size and not the other way around. It takes practice to stick to this risk management habit and discipline to execute it regularly.

The post Proper Position Sizing first appeared on IC Markets | Official Blog.

However, scaling in and out are practices often employed by more experienced traders, as it allows them to take advantage of price action and not miss out on any moves. Scaling in can also enable them to press their advantage if they are able to add to their winning positions. Meanwhile, scaling out can allow cutting losses or reduction of exposure ahead of market catalysts.

In particular, scaling in is often employed by traders who are seeing several potential points of entry. For instance, if you are using the Fibonacci tool to pick an entry in the direction of the trend but the different levels are in line with major or minor inflection points, you can set orders on each level instead of just having to pick one.

What’s tricky about this trading style is that you also have to keep your risk management rules in mind before deciding on the position size to enter at each level. An easy way to go about it is to simply divide your risk percentage by the number of your desired entry levels before calculating the position size based on your stop losses.

Some traders opt to adjust their risk per entry by betting less of their account on the closest possible entries then risking more on farther entries. As mentioned, this depends on your risk profile and whether or not you can keep track of these multiple entries if they are all triggered.

Scaling in can also work to your advantage if you are trading breakouts and would like to add to your position if price keeps making new highs or new lows. For instance, if you predict that an upside break from a 500-pip symmetrical triangle will keep going, you can add to your position every 100 pips and adjust your stops accordingly.

During this course though, you should always be conscious of how much of your account is at risk every time you add. Don’t forget to trail your stop if you’d like to protect your profits and if you’d like to stick to your initial level of risk.

Meanwhile, scaling out means gradually removing exposure, perhaps when a top-tier event is coming up or if you think that the price move is overdone. This way, you can be able to hold on to more profits in case price makes a reversal.

As with scaling in, make sure you are conscious of how much of your account is at risk at every instance. This skill takes some time to develop, as it could involve several calculations based on your adjusted stops and entries. At the same time, you should also keep track of your potential return-on-risk to see if it’s worth adding or reducing your position.

These aspects must be pre-planned when you’re coming up with your trade idea, as it is recommended to have a detailed strategy for various potential scenarios. This way you won’t be surprised or caught off guard when markets make a strong move, and that you are in the position to take advantage of the resulting price action.

The post Scaling-in and Scaling-out first appeared on IC Markets | Official Blog.