Forex Trading with Robots. What do you need to know.
Following the progress of beginners using the forex robots I have decided to write a list of tips that will help them trade successfully.
#1 Understand risk management
#2 How Lot size affects risk
#3 When the Broker refers to leverage what does he really mean?
#1 Risk management.
The first rule of trading is “Don’t risk money that you cannot afford to lose” sounds simple, but people do. The next point is paper trade (use a demo account) until you are confident you have an understanding of what is happening for each trade and you are totally familiar with the settings and what they actually mean. The more you understand the better you will trade (even with a robot). The next rule you will have heard is don’t trade more that 1% of your margin per trade. That is sensible if you have a larger capital. If on the other hand you are trading with under $1000.00 that rule is not realistic. However you do not want to risk all your capital on one trade. If it goes wrong you are out of the game.
#2 How Lot Size Affects Risk.
This is not always clear to beginners, but it is the size of your transaction that depicts the size of your risk. Let me explain if you buy 1 standard lot , that is valued at 100,000 units of the base currency. To make it easier we will use the USD as the base currency, therefore you have traded USD$100,000 and you might only have $1000 as your capital. To find out the leverage you must divide the transaction value by your margin.
Example. 100000/1000 = 100, so for every dollar you have, you have risked $100.00.
If you traded a mini lot valued at $10,000 with the same margin
10,000/1000 = 10, for every dollar you have, you have risked $10
If you traded a micro Lot valued at $1000 with the same margin
1000/1000= 1, for every dollar you have , you have risked $1.00
# 3 When The Broker Refer To Leverage, What Does he Really Mean
When you first open your account the broker will offer leverage 100:1, 200:1 and sometimes 400:1.
This is not true leverage as we have already understood that the Lot size determines the risk/ leverage you use. What the brokers are saying is the minimum amount of margin you must have for each trade. 100:1 means they will require $1000 margin per $100,000 traded. 100:1 is just the % stated as a ratio.
100:1 = 1%, 200:1 = 0.5% etc.
Agreeing with the broker to have 200:1 or 0.5% as a minimum margin does not mean that each trade has to use the full amount they will offer.
Example:
$1000 margin , you can still trade only a mini lot value of $10,000 and your leverage is 10 (as above #2) The advantage of having a small margin requirement is to enable you to trade with a small starting capital. However do not risk all your capital on one trade. Also if you have more than one trade open , the risk of all open trades is added together.
Good luck trading .