Explained: Why You Don’t Need A Large Trading Account To Trade Longer Time Frames

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.

By |2019-03-07T09:31:58+00:00February 28th, 2019|General, How To|17 Comments

17 Comments

  1. urysic July 29, 2012 at 12:12 am - Reply

    Hi Chris,

    I think that you have explained these concepts better than I have seen it done before. Your examples were very clear and and that extra clarity helps drive the point home. Thank you.

  2. simon August 9, 2012 at 1:49 am - Reply

    Hi chris
    …..to me if one does not know money management well, he/she is not ready to trade live and should not…..that is the most basic and psychological for successful retail trading……

  3. Jyoti August 10, 2012 at 4:05 am - Reply

    Hi Chris,

    Very well explained. These ideas look simple, but we need discipline to follow them blindly…

    Thanks

  4. CASEY KAM August 18, 2012 at 2:49 am - Reply

    Hi Chris,

    Being a newbie, I greatly appreciate reading up explanations that are clear and concise like this.

    Had i known about such management techniques earlier i probably would not have busted 3 accounts already.

    Hope all newbies get the benefit of your wisdom. Best regards

  5. Richard January 12, 2013 at 5:55 am - Reply

    Hi Chris,
    We learn on ok so yes as you explained in detail it is possible to trade longer time frames,looking forward to more info from you like a beast with passion
    Richard (South Africa)

  6. Frank Lobach January 22, 2013 at 11:54 am - Reply

    Great way to trade responsibly Chris, but many people get confused by the maths,or slip up occasionally,so I have found that using an excel calculator (one from Hector Deville covers every part needed to work out account size,% risk x ac size, pair value, then gives you lot size, risk to reward ratio,1st 2nd & 3rd profit targets with scaling out ability,pip & cash win values etc).Ohter calculators are also there, and do stop those quick mistakes that can cost so much,but none seem to be able to encompass as much as Hector’s does.You might like to advise on the use of calculators in future ,as a means of simplifying setting orders without the usual mistakes?

  7. Dorothy February 1, 2013 at 12:31 am - Reply

    Thanks Chis info. very helpful.

  8. Jeff June 1, 2013 at 6:44 am - Reply

    Great post, Chris. You’ve a talent for taking what can be a complicated topic and presenting in an easy to grasp, conceptual manner.

  9. Keith Kendrick November 18, 2013 at 1:18 pm - Reply

    I keep thanking you, you keep coming up with what us beginner traders need to know.
    Great.

    • Chris Lee November 18, 2013 at 4:44 pm - Reply

      Hi Keith,

      Thank you for the feedback. I’m glad you find my posts to be helpful.

  10. adexezek44 February 3, 2016 at 10:02 pm - Reply

    Good management gymics!
    GIG

  11. forex forum May 1, 2017 at 5:12 pm - Reply

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    • Chris Lee May 2, 2017 at 5:05 am - Reply

      Thanks for the tip, I appreciate it. I’m not an expert online marketer, I’m just a trader.

  12. Casey Kam May 6, 2017 at 3:12 pm - Reply

    Chris,

    Again, great and clear explanation. I still have the problem of knowing
    1. When to go in
    2. When to come out
    3. How much stop loss and gain to set in a trade.

    Is it possible for you to explain and perhaps provide guidance here?

    Regards

    • Chris Lee May 10, 2017 at 3:07 pm - Reply

      Hi Casey, thanks for the kind words.
      The answer to these questions depends on your trading philosophy and strategy. There is no one-size-fits all method.

  13. betberry September 26, 2018 at 12:52 am - Reply

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    I guess for now i’ll settle for book-marking and adding your RSS feed to my Google account.

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    with my Facebook group. Talk soon!

    • Chris Lee September 26, 2018 at 4:14 am - Reply

      Glad you like the posts! Also, thank you for the kind donation offer but there’s no need for that. You spreading the message is already much appreciated.

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