There seems to be an ever increasing number of brokers out there chasing your business. After spending time reading public forums, it is clear that many forex traders start their journey with a very small account balance.
There are many many brokers out there that will let you open an account with as little as $300. Many of these brokers will not let you trade position sizes lower than $10,000 or 1 mini-lot. It is widely accepted that for many forms of trading, one should use a solid strategy with disciplined risk management, often risking a small percentage of ones balance for each individual trade. Personally I usually risk between 0.5-1% per trade.
Lets take a look at how this would work if we had a $300 account and the smallest lot size we could trade was $10,000. Let’s say we want to risk 1% on a GBP/USD trade. 1% of the $300 is $3. With 1 minilot, each pip is worth $1. So to risk 1% we would need to need to risk 3 pips. Clearly this is not realistic and cannot be done with nearly all trading strategies. Even if you were to risk just 30 pips, that would be $30, nearly 10% of your account on one small trade. Risking such high amounts, combined with inexperience will usually have only one outcome, A big drop in your account balance, possibly even a margin call.
Brokers of course are fully aware of this fact, yet still promote their low minimums as an attractive proposition for a new and experienced trader, despite the fact they are setting them up for a fall. They could offer microlots if they wanted, which are a tenth of the size of a minilot. In my view, it is not suitable for most traders to be using a microlot account with less than $1000 and a mini account with less than $10,000. However, naturally it does vary between strategies and levels of risk tolerance.
Brokers guilty of these practices include FXCM, North Finance, GFT Forex, CMS Forex, Forex.com and many many more. So how does it make you feel that brokers are deliberately setting inexperienced traders up for a fall? Do you think it is the fault of the broker or the inexperienced trader? Should the regulator get involved to stamp it out?
