In our last lesson we learned how to place our first forex trade using our real time demo trading accounts. In this lesson we are going to continue our discussion on the logistics of forex trading with a look at how positions are sized in the forex market.
As with any market you need to specify the amount of a currency pair that you are going to trade as a part of the trading process. Although technically in the spot FX market there are no contract standards since the market trades over the counter, most Forex Trading firms standardize the minimum position size in which you can trade. Once this minimum position size is established then the trader can trade the minimum or any increment thereof going up from there.
Although it varies by firm, most forex trading firms offer at least one of, if not all of, the following options for position sizing:
Option 1: Standard Account A standard account trades "standard" contract sizes which in the retail fx market are 100,000 of the base currency. So for example if you are trading EUR/USD then the minimum position size you could trade would be 1 contract which would equal 100,000 Euro's against the equivalent amount in US Dollars. As the EUR/USD is trading at 1.5678 as of this lesson that would be 100,000 EUR against 156,780 US Dollars.
As a second example if you were trading USD/JPY in a standard account then the minimum you could trade would be 100,000 US Dollars against the equivalent amount of Japanese Yen. As the Japanese Yen is currently Trading at 101.27 against the US Dollar this would be 100,000 USD against 10,126,000 JPY.
Option 2:Mini Account A mini account trades "mini" contract sizes which are 1/10th the size of standard contract sizes or 10,000 of the base currency. So using our examples above if you were trading EUR/USD the minimum you could trade on a mini account would be 10,000 EUR against $15,678 USD.
If you were trading USD/JPY in in a mini account then the minimum amount you could trade would be 10,000 USD against 1,012,700 JPY.
Option 3 Flexi Account: A flexi account allows you to trade any size you would like. So for example instead of having to trade a fixed position size in a flexi account you could trade a position size of 5,765 EUR/USD which would be 5,765 EUR against the equivalent amount of USD.
As you can see from these examples one of the great things about the forex market is the ability to trade very small position sizes, which allows traders to start with a smaller account balance and avoid being over leveraged, something we will discuss in later lessons.
Secondly, as normally the spread which you pay does not increase as the trade size gets smaller and there are no commissions, the transaction cost you pay for the trade gets smaller as the trade gets smaller as well.
As a quick example lets login to our demo trading accounts and place another quick trade. If you have not done so already I encourage you to pause this video now and register for a free demo trading account which you can do by clicking the link above this video if you are watching on InformedTrades.com or to the right of this video if you are watching on YouTube.
Once logged into the account choose the currency pair that you want to trade and click in the dealing rates window to bring up the market order box. In this box you will see a line that says "Amount K". As you will notice if you pull down the drop down menu there it goes in increments of 100K or 100,000 of the base currency. As you should now know from learning about the three types of accounts that we just covered as we are trading a contract size of 100,000 of the base currency we are currently on a standard account.
As you can see from the market order window if you would like to trade more than 100K then simply pull down the drop down menu and select the amount you would like to trade in any increment of 100,000 of the base currency and you are good to go.
Thats our lesson for today, in our next lesson we will learn what a pip is as well as something known as fractional pip pricing how to calculate profits so we hope to see you in that lesson.
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WEEKLY Forex Economic Calendar: 24 Feb Fri
13:30 CA- CPI
15:00 US- New Homes Sales
15:00 US- final Univ of Mich Survey
13 Feb Mon
No Major Data 27 Feb Mon
13:30 US- Durable Goods 28 Feb Tues
07:00 DE- Retail Sales
10:00 EZ- flash HICP
13:30 US- GDP
15:00 US- CB Consumer Confidence
15:30 US- EIA Crude 1 Mar Wed
All Day- final Mfg PMIs
08:55 DE- Jobless
13:30 US- PCE Deflator
15:00 CA- Bank of Canada Decision
15:30 US- EIA Crude
19:00 US- Beige Book 2 Mar Thu
13:30 US- Weekly Jobless
23:30 JP- CPI 3 Mar Fri
All-Day SVC PMIs
Markets are heading into the weekend with a risk-off posture. Worries about European elections over the next several weeks appear to be fading for the moment. On the other hand, all the hysteria about the Trump Presidency has begun to abate. The new administration is starting to learn that the U.S. political system with its checcks and balances is designed constitutionally to be slow to change.
Some have been pushing the date for a Fed rate hike back to May. I don't see much of asentiment shift in Fed Funds futures. I still feel the Fed hikes in March barring a significantly weaker than expected February jobs report on March 10. The FOMC Minutes left open the door to the RISK of a Rate hike as early as the March 15 FOMC ("fairly soon"). No clear signal was sent. The Fed would like to embark on a policy "normalization". Some have trouble believing they have the courage to go through with a rate hike. For Yellen to build market credibility, she should hike rates soon. Fed Funds futures odds for a March Fed rate hike are only 38% (34%), suggesting they are skeptical. Markets now place the odds for rate hikes by June at 112% (116%).
On top of the Fed muddle, investors have begun to worry about the risk from key leadership elections in Europe over the rest of the year. Many worry about the possibility of a swing to right as has been seen in the U.K. (Brexit) and U.S. (Trump). Such could be a challenge to the status quo in the EU.
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