Learn how you can mitigate your risk exposure with smaller lot sizes
The forex market is a dangerous proposition for beginner traders who don’t have the necessary experience to be able to handle all the risks that come with trading the financial markets. Price movements may seem illogical at times, but the truth is that interest rates, geopolitical developments and economic uncertainty are only some of the forces that can affect the market sentiment and inject volatility on the price charts.
However, even if the markets are inherently volatile and largely unpredictable, external factors are just one side of the story. In fact, the main reason that the majority of currency traders fail to achieve consistent results is because of greed which leads to overtrading or trading with higher amounts than their equity can sustain.
Lots and position sizing
Trading currencies involves buying or selling substantial amounts of currency units. This is because traders need the price to move in order to make a profit, but these price movements are typically less than 100 pips and a pip is just a small fraction of a currency’s value.
Therefore, instead of trading one or two dollars, you buy or sell lots, where a standard trading lot is equivalent to 100,000 units of a currency. This is similar to buying eggs from the grocery store. You wouldn’t buy just one egg, and this is why they come in cartons holding from 6 to 24 eggs each.
That being said 100,000 units is a substantial amount and even though brokers usually offer leverage which allows traders to only have a small percentage of their total position size available as equity, it’s still not a recommended amount for beginner traders. The more currency units you buy, the higher your risk exposure is going to be, as each pip movement has greater value.
For example, buying one standard lot in EUR/USD is equivalent to $100,000 and a pip is worth $10 each. As such, if the exchange rate drops by 10 pips, you would be liable to lose $100 in just a few seconds and remember, the market can move by more than 100 pips in a single day or even hour.
However, the opposite is true as well and if the exchange rate climbed by 10 pips instead it would have resulted in $100 of profit and this is why traders usually prefer to trade with high position sizes even though it’s risky.
Thankfully, most brokers will offer much lower trading lot sizes including mini lots (10,000 units), micro lots (1,000 units). This way, you can decide the amount of risk you will be exposing yourself with each trade.
With mini and micro lots, each pip is worth $1 or $0.10 respectively, which makes it much easier for novice traders to open positions without risking a large percentage of their account with each trade.
A tighter position size limits your potential profit, but it provides a more sustainable trading approach for beginners and leads to more consistent results. If you have been trading on a demo account for some time now and are willing to transition to live trading with real money, we highly recommend that you start with micro lots and work your way up.
Trade with superior trading conditions
Position sizing plays a critical role in your exposure to the markets and as a trader, you still need to consider the spread, transaction fees and the safety of your funds.
CM Trading is an award-winning and licensed broker by the Financial Sector Conduct Authority in South Africa and is committed in providing the most favorable trading conditions for both beginner and experienced clients.
CM Trading’s offering includes micro lot trading for all currency pairs along with 200:1 leverage and the lowest spreads available, in order to enable traders to get more value out of their investment. Each client receives a unique educational package with access to online webinars covering the most important aspects of trading their markets while a personal trading specialist is always available to provide assistance and advice regarding the ideal position size for your risk tolerance and profit targets.
If you are interested in becoming a successful trader, sign up for an account below and we’ll provide you with all the tools you need to achieve profitability in the financial markets.
Register here to get started!