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You have traded Forex in demo for months. Your understanding of your strategy and trading plan is good, your percentage of successful trades is high. You feel are ready for the real thing! Do you pull $100,000 out of the bank and place it is the Forex brokerage account and start trading live? NO!

Instead use Forex Mini Trading and just put a small amount of real money at risk first, and use the high leverage available in FX to trade that small amount in the real market and be able to trade multiple lots but only risk tiny amounts of real cash. Let’s have a closer look into Forex Mini Trading.

Let’s define some terms. A “lot” is the quantity of currency that is being exchanged when you make a trade. The lot size can vary from a “standard lot” of $100,000 to a “mini lot” of $10,000 to a “super-mini lot” of $1,000. The larger the lot the more you make (or lose) per pip, standard lot = $10 pips, mini lot = $1 pips, super mini lot = $0.10 pips.

So you can trade the real market with a $1,000 account using super mini lots and be able to practice your strategy using multiple lots just as you would do in your demo $100,000 account.

Is trading with a mini and super mini lot size trading with the real market? Usually no. You are trading “in house” with the broker, your trades never see the real Forex market. Major traders and banks don’t usually deal in anything less than a “standard lot” that is why they are called that, it’s the industry standard, actually the lowest amount they commonly trade. When you trade the minis and super minis you are trading with your own broker on the other side.

Are there disadvantages to trading “in house”? Usually yes, the broker offers you this smaller entry lot size to get you started in trading, but they are on the other side of each trade, so it is not necessarily in their best interest financially that you be successful, so such brokerages usually have “slow” trade stations with multiple “safeguard” warning pop ups which are designed to prevent the new trader from making mistakes but also slow the experienced day trader down and cause him to miss entries and exits while he answers these warnings that have long since ceased to be useful to him.

But if you know the pluses and minuses you can make an informed decision whether to use Forex Mini Trading or not, and for the most part as you start the step of Live Forex trading in your educational process it is a useful tool being able to trade with $0.10 pips and then move them up to $0.50 pips and then $1.00 pips and then $5.00 pips before you go the whole distance and trade $10.00 pips and multiple lots of those like the pros do.

Best to you,
Phil

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1 Comment »

Comment by Jonty
2007-11-30 03:50:05

One must be careful with this distinction “real market”. Everyone that makes a market and find deals for the prices they make participate in the real market. While there can be no doubt that as short a time as 5, 6, 7 years ago retail traders were at the mercy of dealers in a forex retail brokerage dealing room one must also recognize who quickly and how much things have changed around.

Retail forex is recognized as a force in currency trading world wide. The sell side providers (the so called Interbank) see the typical retail forex brokers as what they call “liquidity aggregators”. The reason is that they have a reach where the sell side can’t get and they aggregate many small trades, package them and pass them on through the system (a back to back clearing house system for risk you are not prepared to take in house) where the eventually reach the sell side and can be counted.

It is estimated in the August 16 – 17th (2007) rout that 35% Japanse retail traders lost their accounts due to the lethal combination of too high leverage and un-protected carry trades (short JPY, long USD, AUD, GBP and other high yielders).

As the number of retail traders increased (and still do) the dynamic of the retail market has changed a lot. It is not a fair representation of a typical large forex retail dealing room as a handful of rogue dealers sitting ready to run poor new trader’s stops. The volumes going through these dealing rooms because of thousands and not one tens or 100s of clients make it actually possible to be profitable from being an intermediary, i.e. making money of the spread. technology advances made it possible to aggregate trades automatically and pass on to a clearinghouse or prime brokerage which can accept odd lots due to the technology. Dealer intervention is thus minimized and limited to high risk periods like low liquidity fast markets, like around economic data releases.

Beginners should under no circumstances be concerned that it would be to their disadvantage to trade with smaller positions being offered. Although volumes have increased remarkably you can’t run a forex brokerage by trying to con traders out of a few cents here and there.

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