A common misconception about trading on the longer term is that it can only work with a large trading account.

The thought-process goes as such:

When trading on a larger timeframe, one needs a larger stop loss allowance.

With a larger stop loss allowance, the trading account needs to be larger to withstand larger losses.

So is this true?

Is a large trading account required, to trade on the longer time frames?

Nope!

The 2 statements above are completely understandable, since they seem to make sense.

However, what’s left out here is a small detail called the ‘trading lot size’.

An Example

Let’s look at the accounts of 2 different traders – Trader A at $20,000, and Trader B at $500.

Both accounts trade with a leverage ratio of 1:100.

Trader A looks to take a medium-term trade with a stop loss of 280 pips, and does not want to risk more than 6% of his account on it.

Here’s some quick math:

Maximum allowable $ loss = 6% x $20,000 = $1,200

This is the dollar amount Trader A loses, if the stop loss is triggered.

Maximum allowable pip loss = 250 pips

This is the number of pips Trader A losses, if the stop loss is triggered.

Dollar per pip = $1,200/250 = $4.80

Trader A should take the trade with a lot size that yields a maximum of $4.80 per pip. Basically, this means that he should be trading with a maximum lot size of 4.8 mini lots.

Now, is Trader B able to take the same medium-term trade?

Let’s take a look at the math:

Maximum allowable $ loss = 6% x $500 = $30

This is the dollar amount Trader B loses, if the stop loss is triggered.

Maximum allowable pip loss = 250 pips

This is the number of pips Trader B losses, if the stop loss is triggered.

Dollar per pip = $30/250 = $0.12

Trader B should take the trade with a lot size that yields a maximum of $0.12 per pip. Basically, this means that he should be trading with a maximum lot size of 0.1 mini lots.

As you can see, it actually is possible for Trader B to take the same medium-term trade even though he has a much smaller account.

The key to this, is the trading lot size.

However, there’s a limit to this, as most brokers require a minimum trading lot size of 0.1 mini lots (or 1 micro lot).

Let’s take a look at the example of Trader C, who has a $250 account and wants to take the same trade.

Maximum allowable $ loss = 6% x $250 = $15

Maximum allowable pip loss = 250 pips

Dollar per pip = $15/250 = $0.06

This works out to 0.06 mini lots, or 0.6 micro lots (or 6 nano lots).

In this case, Trader C can only take the trade if he trades with a broker that allows trading with nano lots.

…but wait!

Even if Trader C’s broker doesn’t allow nano lots, there actually is one thing Trader C can do to still take the trade…

And that’s by increasing his loss exposure.

Instead of risking 6% of his account on the trade, let’s say he agrees to double that and risk 12% of his account instead:

Maximum allowable $ loss = 12% x $250 = $30

Maximum allowable pip loss = 250 pips

Dollar per pip = $30/250 = $0.12

Trader C can take the trade with a lot size of 0.1 mini lots.

Ta-da!

Like magic.

But Be Careful

The point of this post is not to get you to increase your exposure to larger losses – don’t allow your greed to overcome caution!

Instead, this post was written to get you thinking about the importance of understanding how the numbers work in your trading account, and how you can manipulate the various elements to achieve your goals.

Money management is definitely the least exciting aspect of trading, but to be an effective trader you must understand how leverage, margin, trading lot size and the stop loss allowance are linked to each other.

Once you truly understand these essential components, you’ll be able to use your trading account in ways that most retail traders will never know how to.