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Mini Forex Trading - Trading A Forex Mini Account Explained Properly



 
 
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Old November 26th 09, 05:14 PM posted to misc.invest.canada
Amos Hannah
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Posts: 12
Default Mini Forex Trading - Trading A Forex Mini Account Explained Properly

In forex, for the retail investor, things are totally different than
the banks and institutions who trade with each other 24 hours per day
on a daily basis and in the millions with actual transactions occuring
(usually 2-3 days later also known as the Spot Value).
Investment banks will take out a credit check on each other, a bit
like when a person applies for a mortgage. Whilst currency trades are
placed and completed real-time either by computerised system or
telephone, the actual transfer of funds happens a couple of days
later.
However, with the retail forex trader, usually, the trade is only
placed in the brokers books and no real transfer of funds occurs,
although the retail investor is in effect trading with the banks at
almost the same quotes and with a very similar spread these days.
So who is the forex broker and what is their relevence in the answer
to this forex topic? The retail investor places their trades through
the environment of the margin broker. Trades are placed in real time
and via a trader who receives the order from the investor, either buy
(long), sell (short) or close position.
The broker not only allows retail investors to trade forex live with
the banks, but also provides a system of leverage. This means that the
broker only requires a deposit to represent the amount of currency a
person wants to control, so long as the deposit is enough to cover any
losses that might be incurred by the trade.
Take for example a margin leverage of 100:1 given to you by the
broker. This means to control $100,000 of real currency (1 lot), you
need to provide security to the broker of only $1000. Each 'pip'
movement in price will cause your equity to increase or decrease by
$10. For example if the currency pair you are trading is GBP/USD (also
known as cable) and the price you are quoted is 1.8484, this means 1
UK pound sterling is equal to 1.8484 US dollars.
So, if you are controlling 100,000 units of currency (or you have
placed a buy/sell forex trade of '1 lot')in the above case, each time
the price changed by 1 pip - ie. 1.8484 changes to 1.8485 - you gain
or lose $10 US. This is because 0.0001 x 100,000 = 10 and you have
opted to control 100,000 units of currency.
The amazing thing though is that you as a retail trader have only used
a security measure of $1000 deposited with the broker in your
brokering account and the only cost for placing the trade is a small
spread (no comission in many cases) of say 2-3 pips in which the
broker makes his profit regardless of whether your trade is successful
or not. And the chances of you losing that entire $1000 in the trade
are extremely slim, especially if you use risk management and
safeguard your capital from losses by setting a "stop loss" - a topic
out of the scope of this article.
So what about mini-forex trading. It's a subject which many people
seem to want to know about. What is a mini-forex trading account? What
is mini forex trading? Mini Forex trading is quite simple to explain
given the above information. In light of the information that is told
to you above about retail forex trading in general, the use of a mini-
account is exactly that!
Rather than trading 1 whole lot each time (ie controlling 100,000
units of currency using only 1000 units of security or deposit to
trade for a profit of about $10 per pip depending on the forex
currency pair you and trading) you can use a mini-account (sometimes
this is entirely indistinguishable from a standard account) to trade a
fraction of a lot. This could technically be as little as 0.1 lot (ie
$1 profit per pip) or half a lot - $5 profit per pip etc. This is the
authors understanding of mini-forex-trading.
In conclusion then, mini forex trading is explained away by
understanding what a 'lot' is in forex. Once you understand that forex
is traded in 'lots' and what '1 lot' means to the investment banker/
forex trader in the bank and to the retail investor using margin
leverage provided by a broker, you can understand that mini-forex
trading is forex trading on a mini-scale. Instead of trading in lots
or multiples of lots (more than one) the retail investor uses a
smaller deposit with the broker and trades for less profit, but less
risk as well and not needing so much profit to start out with, eg 0.1
lots or 0.5 lots. Some forex brokers these days will allow currency
trading with a deposit of as little as $500 into a customers account.

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