Forex trading is an excellent way to make money online. It has been embraced by people trading on a full-time basis and those trading on a part-time basis. Yet, one of the most common challenges among traders is sufficient funding. In this article, I will explain some of the top strategies to help you grow your small account into a large account balance in forex.
The risk of a small forex account
Before we look at some strategies to use when trading with a small account, it is necessary to note that doing so is riskier than using a big account. The risk happens because of the tough challenge that emerges when you make a substantial loss when using a small account.
Let us use this example. Assume that you have a small account with a balance of about $100. If you lose $50 of this account, you’ll be down 50% of your balance. Now, assume that a friend who has a $50,000 account and lost the same $50. His account will only be down 0.1%. It’s extremely easier to hit back a 0.1% loss than a 50% loss!
Therefore, growing your account from $100 is more difficult than growing an account from $50,000, as the relative risks per trade vary.
A good example of this is Bill Ackman, who lost more than $5 billion when his Herbalife and Valeant Pharmaceuticals went south. It would have been difficult for him to recover his funds if he had a small account.
Have a solid strategy
A key rule to ensure that you grow your account from a small one into a big one is to have a solid strategy in place. Indeed, this is one area where many day traders go wrong. They start by seeing a broker advertisement on TV or on the internet and then jump straight in. This is wrong. Instead, you should take trading as a long journey that must begin with a step.
In this case, you should ensure that you know what forex trading is and how it works. Contrary to popular opinion, you don’t need to enroll in a school to learn about it. Also, you don’t need to have a business or finance-related degree. You can take advantage of free learning materials that are available on the internet. YouTube is a good resource.
You should focus on learning and creating a strategy. Fortunately, all forex brokers provide their traders with a demo account that has all tools that are available in a real account. The only difference is that a demo account’s funds are virtual.
Therefore, as part of your journey, you should ensure that you have a solid strategy that is tested. You should use the demo account to test this strategy. When doing this, you should avoid one of the most popular mistakes in trading. The mistake is where you use a demo account with funds you won’t use in trading. For example, if your goal is to start trading with $100, it is wrong to start with a demo account that has $10,000.
Use leverage well
Leverage is an important tool offered by many forex traders. Leverage essentially gives you extra liquidity to magnify your trades. For example, if you select leverage of 1:100 and you have a $100 account, it means that you can trade as if you have $10,000. Leverage can lead to substantial profits when used well.
However, leverage is one of the riskiest things in forex trading. In fact, leverage is often described as a double-edged sword. This simply means that if it works well, leverage can lead to substantial profits. However, in case things go south, it is possible to lose more money. For brokers without negative balance protection, it is possible to lose more money than what is in your account.
Leverage is so risky that many regulators have put regulations to limit it. In Europe and Australia, regulators have reduced the maximum amount of leverage brokers can offer to 1:30.
As a person with a small account, you may be tempted to start with the biggest leverage available. However, doing this is a relatively risky thing since you will be exposing yourself to a big loss. Instead, in your crawling stage, we recommend that you start with small leverage. You should then boost this leverage as you grow your account.
Position sizing, stop-loss, and pending orders
The next strategy to use when trading a small account is to position your trades well, embrace stop-loss and take-profits, and use pending orders. Let us look at these individually.
On position-sizing, you should focus on opening relatively small-sized trades. While these trades will not make you a lot of money, they will help to validate your trading strategy. For example, if you have a $100 account, you should select a lot size that is less than 0.05.
A stop-loss is a tool offered by all forex brokers to help you in risk management. The tool will stop your trades automatically when your predetermined loss threshold is reached.
For example, if you have a $200 account, you could have a risk ratio of about 3%. In this case, the maximum loss you can make per trade is $6. Therefore, you could place your stop-loss where the maximum loss is $6. In this case, when your trade goes south, it will automatically be stopped at that level. You should always protect your trades with a stop-loss.
Further, instead of opening your trades at the market price, we recommend that you embrace pending orders. This is where you place a buy-stop or buy-limit and sell-stop or sell-limit. These pending orders, when used well, can help you make conditional orders.
For example, if the EUR/USD has faced strong resistance at 1.1200, you could place a buy-stop order at 1.1220. In this case, if the pair rises above this level, a buy trade will be initiated. It is a better option than just placing a buy order at the current level.
In my experience, I have seen many people start trading with as little as $300 and go on to become successful traders. After proving a trading strategy, most of these people end up raising money from family and friends. Similarly, you too can do the same and become a successful trader.