Why You Want To Trade A Lot

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The Minimum Capital Required to Start Day Trading Forex

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It’s easy to start day trading currencies because the foreign exchange (forex) market is one of the most accessible financial markets. Some forex brokers require a minimum initial deposit of only $50 to open an account and some accounts can be opened with an initial deposit of $0.

And unlike the stock market, for which the Securities and Exchange Commission requires day traders to maintain an account with $25,000 in assets, there is no legal minimum amount required for forex trading.   

But just because you could start with as little as $50 doesn’t mean that’s the amount you should start with. You may want to consider some scenarios involving the potential risks and rewards of various investment amounts before determining how much money to put in your forex trading account.

Risk Management

Day traders shouldn’t risk more than 1% of their forex account on a single trade. You should make that a hard and fast rule. That means, if your account contains $1,000, then the most you’ll want to risk on a trade is $10. If your account contains $10,000, you shouldn’t risk more than $100 per trade.

Even great traders have strings of losses; if you keep the risk on each trade small, a losing streak can’t significantly deplete your capital. Risk is determined by the difference between your entry price and the price at which your stop-loss order goes into effect, multiplied by the position size and the pip value.

Pip Values and Trading Lots

The forex market moves in pips. Let’s say the euro-U.S. dollar (EUR/USD) currency pair is priced at 1.3025. That means the value of one euro, the first currency in the pair, which is known as the base currency, is $1.3025.

For most currency pairs, a pip is 0.0001, which is equivalent to 1/100th of a percent. If the EUR/USD price changes to 1.3026, that’s a one pip move. If it changes to 1.3125, that’s a 100 pip move. An exception to the pip value “rule” is made for the Japanese yen. A pip for currency pairs in which is the yen is the second currency—called the quote currency—is 0.01, which is equivalent to 1 percent.   

Forex pairs trade in units of 1,000, 10,000 or 100,000, called micro, mini, and standard lots. 

When USD is listed second in the pair, as in EUR/USD or AUD/USD (Australian dollar-U.S. dollar), and your account is funded with U.S. dollars, the value of the pip per type of lot is fixed. If you hold a micro lot of 1,000 units, each pip movement is worth $0.10. If you hold a mini lot of 10,000, then each pip move is $1. If you hold a standard lot of 100,000, then each pip move is $10. Pip values can vary by price and pair, so knowing the pip value of the pair you’re trading is critical in determining position size and risk.

Stop-Loss Orders

When trading currencies, it’s important to enter a stop-loss order in case the value of the base currency goes in the opposite direction of your bet. A simple stop-loss order would be 10 pips below the current price when you expect the price to rise or 10 pips above the current price when you expect the price to fall.

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Capital Scenarios

$100 in the Account

Assume you open an account for $100. You will want to limit your risk on each trade to $1 (1% of $100).

If you place a trade in EUR/USD, buying or selling one micro lot, your stop-loss order must be within 10 pips of your entry price. Since each pip is worth $0.10, if your stop loss were 11 pips away, your risk would be $1.10 (11 x $0.10), which is more risk than you want.

You can see how opening an account with only $100 severely limits how you can trade. Also, if you are risking a very small dollar amount on each trade, by extension you’re going to be making only small gains when you bet correctly. To make bigger gains—and possibly derive a reasonable amount of income from your trading activity—you will require more capital.

$500 in the Account

Now assume you open an account with $500. You can risk up to $5 per trade and buy multiple lots. For example, you can set a stop loss 10 pips away from your entry price and buy five micro lots and still be within your risk limit (because 10 pips x $0.10 x 5 micro lots = $5 at risk).

Or if you choose to place a stop loss 25 pips away from the entry price, you can buy two micro lots to keep the risk on the trade below 1% of the account. You would buy only two micro lots because 25 pips x $0.10 x 2 micro lots = $5.

Starting with $500 will provide greater trading flexibility and produce more daily income than starting with $100. But most day traders will still be able to make only $5 to $15 per day off this amount with any regularity.

$5,000 in the Account

If you start with $5,000, you have even more flexibility and can trade mini lots as well as micro lots. If you buy the EUR/USD at 1.3025 and place a stop loss at 1.3017 (eight pips of risk), you could buy 6 mini lots and 2 micro lots.

Your maximum risk is $50 (1% of $5,000), and you can trade in mini lots because each pip is worth $1 and you’ve chosen an 8 pip stop-loss. Divide the risk ($50) by (8 pips x $1) to get 6.25 for the number of mini lots you could buy without exceeding your risk. You would break up 6.25 mini lots into 6 mini lots (6 x $1 x 8 pips = $48) and 2 micro lots (2 x $0.10 x 8 pips = $1.60), which puts a total of only $49.60 at risk.

With this amount of capital and the ability to risk $50 on each trade, the income potential moves up, and traders can potentially make $50 to $150 a day, or more, depending on their forex strategy.

Starting out with at least $500 gives you flexibility in how you can trade that an account with only $100 in it does not have. Starting with $5,000 or more is even better because it can help you produce a reasonable amount of income that will compensate you for the time you’re spending on trading.

Choosing a Lot Size in Forex Trading

When you first get your feet wet with forex training, you’ll learn about trading lots. A lot references the smallest available trade size that you can place when trading currency pairs on the forex market. Typically, brokers will refer to lots by increments of 1,000, or a micro lot. It is important to note that the lot size directly impacts and indicates the amount of risk you’re taking.

Lot Size Matters

Finding the best lot size with a tool like a risk management calculator or something similar with a desired output can help you determine the best lot size based on your current trading account assets, whether you’re making a practice trade or trading live, as well as help you understand the amount you would like to risk.

The trading lot size directly impacts how much a market move affects your accounts. For example, a 100-pip move on a small trade will not be felt nearly as much as the same 100-pip move on a very large trade size.

You will come across different lot sizes in your trading career, and they can be explained with the help of a useful analogy borrowed from one of the most respected books in the trading business.

Trading With Micro Lots

Micro lots are the smallest tradable lot available to most brokers. A micro lot is a lot of 1,000 units of your account funding currency. If your account is funded in U.S. dollars, this means that a micro lot is $1,000 worth of the base currency you want to trade. If you are trading a dollar-based pair, 1 pip would be equal to 10 cents. Micro lots are very good for beginners that want to keep risk to a minimum while practicing their trading.

Moving up to Mini Lots

Before micro-lots, there were mini lots. A mini lot is 10,000 units of your account funding currency. If you are using a dollar-based account and trading a dollar-based pair, each pip in your trade would be worth about $1.00. If you are a beginner and you want to start trading using mini lots, make sure that you’re well-capitalized.

While $1.00 per pip seems like a small amount, in forex trading, the market can move 100 pips in a day, sometimes even in an hour. If the market is moving against you, that adds up to a $100 loss. It’s up to you to decide your ultimate risk tolerance. but to trade a mini account, you should start with at least $2,000 to be comfortable.

Using Standard Lots

A standard lot is a 100,000-unit lot. That is a $100,000 trade if you are trading in dollars. The average pip size for standard lots is $10 per pip. This is better remembered as a $100 loss when you are down just 10 pips. Standard lots are for institutional-sized accounts. That means you should have $25,000 or more to make trades with standard lots.

Most forex traders that you come across are going to be trading mini lots or micro-lots. It might not feel glamorous, but keeping your lot size within reason relative to your account size will help you preserve your trading capital to continue trading for the long term.

A Helpful Visualization

If you have had the pleasure of reading Mark Douglas’ Trading In The Zone, you may remember the analogy he provides to traders he has coached, which he shares in the book. In short, Douglas recommends likening the lot size that you trade and how market moves would affect you, to the amount of support you have under you while walking over a valley when something unexpected happens.

To illustrate this example, a very small trade size relative to your account capital would be like walking over a valley on a very wide, stable bridge where little would disturb you even if there was a storm or heavy rains. Now imagine that the larger the trade you place the smaller and riskier the support or bridge under you becomes.

When you place an extremely large trade size relative to your account balance, the bridge gets as narrow as a tightrope wire, such that any small movement in the market would be like a gust of wind in the example, and could send a trader the point of no return.

Dealership Trade-in Tips & Advice

Trade-in Process Topics

I will always recommend selling your trade-in on your own over trading it in at a dealership. When selling a vehicle on your own, you can ask for more money (retail prices) than what a dealer will ever offer you. I understand some people must trade because they don’t have the time or patience. This section will teach you some basic tips and tricks to help you navigate a dealers trade in process.

There are two things a dealer will do when you trade your car in, offer you wholesale or less for your vehicle, and attempt to “hold money on your trade”. This means they will start the negotiations on your trades value way less than what your vehicle is really worth. The do this to see if they’re able to “steal your trade,” or buy your vehicle for a lot less than it’s really worth.

Dealers make a lot of money when people trade in their cars. Before trading in a vehicle with a dealership, make sure you read this section to increase your chances on getting the most money possible for your trade-in and avoid any car dealer scams.

If You Must Trade Your Vehicle In

It’s understandable most people don’t want to worry about strangers coming to their house or have the time to sell their current car privately. These people prefer to just get it over with by trading it in at the dealership they’re buying another car from.

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Trading your car at a dealership is a lot easier than trying to sell it privately. Some states will even give you a sales tax break by only making you pay sales tax on the “trade difference.”

If a dealer gives you $8,000 for your vehicle and your state sales tax rate is 8.25%, you will save $660 in taxes. Keep in mind, if you took the time to sell it for retail on your own, you may get $11,000 or more.

Should I Tell the Dealer I have a Trade-in?

Professional car salesman will tailor their “fact finding” questions into normal conversation. These questions will be something like, “How do you plan to pay for your new car?” “Are you putting any money down on the vehicle?” And, “Will you be replacing or adding a vehicle with this purchase?”

Do not tell the dealer early in the car buying process you want to trade your car in. If a salesperson asks you if you’re trading in a vehicle, tell them “no” or “not at this time.” The reason you tell them you’re not trading early in the process is to keep the dealer as honest as possible. You still have the right to change your mind later in the process.

If you tell a dealer you’re trading a vehicle to soon. They may use this information against you during the negotiation process by giving you a very low purchase price on the car you want to buy and then make up the lost profit by holding on your trade.

Read more about the very common trade-in value scam and how it works.

What Not to Say About Your Trade

Most car dealers will come right out and ask you what you want for your trade-in as soon as possible. What the dealer is trying to do is find out if you’ve educated yourself on your vehicle.

I don’t know how many times I would hear, “I think my car is worth $XX,XXX.” My next question to the customer was, “where did you come up with that number?” Most customers would then say, “I just think it’s worth that.”

Making a statement like this to a car salesman puts you at a huge disadvantage. You just let the dealer know you haven’t done your homework and they’ll most likely hit you with a very low value for your trade-in.

What if Your Asked How Much You Want for Your Trade

As stated above, a dealer will ask early in the sales process if you’re trading a car. As harmless as this question sounds it’s a big part of the salesperson’s agenda. The dealer will use this information against you later during the negotiating stage. They will also ask you how much you want for your trade.

When you decide to bring up your trade. This is exactly what you should say if the salesperson or manager that asks you how much you want for your trade:

“I have no idea, you tell me what it’s worth.”

A dealer does not like the above answer and will most likely keep prying to get a number out of you on what you think your car’s worth. Hold your ground and act oblivious on how much your car’s worth. Whatever you do, don’t give them a figure, make them give you a figure first.

How to Estimate the Value of Your Trade

The last thing you want to do is let a dealer tell you how much your trade is worth without doing some kind of research yourself. I guarantee you they will attempt to “steal” your vehicle from you by offering you much less than what it’s really worth.

How to avoid a dealer low-balling you is by determining an estimated value of your trade before contacting a car dealership. This will keep the dealer from having the opportunity to take advantage of you when negotiating the value of your trade vehicle.

A vehicle appraisal is just one person’s opinion.

If you tell 10 used car managers to appraise the same car, you will get 10 different values of what they believe the car is truly worth.

I know I’m going to hurt some readers feelings out there but SENTIMENTAL VALUE does not add to the true value of your trade. What a vehicles worth is what it’s worth. Even though it’s your first car or you’ve never had any problems with it, it’s only going to be worth so much money.

So how do you find out the value of your trade? It’s not an exact science, however there are some steps you can take to get a good idea of what your car is worth.

How to Get the Most Money for Your Trade-in

When you trade your car to a dealership you’re actually selling your car to the dealer. Your goal is to get as much money as you can for your trade-in.

As a dealer myself, I’ve appraised thousands of vehicles. I can tell you I’d personally deduct money if the car I was appraising was filthy dirty or full of trash.

Why would you make me get in and drive your nasty car around the block? I wouldn’t even want to sit in it! I promise you there are other dealers out there that feel the same way and will deduct money from the value of your trade.

On the other hand when I appraised a clean car that looked and drove like it was taken care of. I would be more inclined to value the vehicle higher than if it was filthy.

I’ve put together a list of some very effective tips to increase the value of your trade with little or no cost to you. These little tips will increase your chances on getting more money from a used car appraiser when he looks at your car.

Ryde Shopper has one of the largest new car dealership networks in the world. Select the make and model you’re interested in and they will instantly search clearance pricing within your local area. Don’t forget to select as many dealers as possible to increase your chances for the greatest discounts and savings.

MotorTrend is one of the best kept secrets on the Internet. Best known for their automobile magazine, MotorTrend also has a vast dealer network across the nation. They’re referral service is 100% free and there’s no obligation to purchase. Just pick the vehicle you’re interested in, select all your local dealers, and receive deep discount Internet pricing.

CarsDirect has been in business since 1998 and has all the right tools to help you find your next new car. They offer a no-hassle experience from configuring a car to making the final purchase. You’ll find your next car quickly and easily.

How the Used Car Appraisal Process Works

The appraisal or trade-in process is when you turn your keys over to the dealership and let them value your vehicle.

The used car manager or appraiser will look at your car, inspect it, test drive it, check the current market for your car and then put a wholesale value on your car. They will then present the value to you. At this time you either accept it or not.

When trading a vehicle you turn into the “Seller”
and the car dealer becomes the “Buyer.”

During the appraisal or trade-in process is when car dealers have an opportunity to enhance their profit. If you’re not educated about this process you can become a victim quickly.

How to Sell an Old Junk Car

A dealer may tell you they are giving you an unbelievable amount for an old junk car but I promise you they’re going to attempt to make it up on your somewhere else during the car sale.

If you have a car that doesn’t run or it doesn’t have much value. You may want to look into an alternative other than trading it in with a car dealership.

There are many other ways to dispose of an old junk car and turning it into quick cash.

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Ryde Shopper, Motor Trend and Cars Direct are the quickest way to compare new car prices in your local area. These online sites will provide you with free, no-obligation price quotes and the discounts you receive will give you confidence on your next new car purchase. Walk away from the dealership knowing you received a good deal, not hoping you did.

As the old saying goes, “knowledge is power.” This certainly applies to knowing how much your vehicle is worth to a dealer.

Find your vehicle’s trade-in value here.

You will not make as much money if you trade your vehicle in at a dealership. You should always attempt to sell your vehicle privately or on your own.

Buying a car and trading a car should be looked at like two separate transactions.

When you buy a car you are the “buyer.” When you trade a car you’re actually selling it to the dealer, so you become the “seller.”

Always agree to a purchase price on the vehicle you want to buy before you bring up you want to trade a vehicle.

Have local car dealers compete for your business. Start an online bidding war between dealers from the comfort of your computer.

Get local dealers to compete for your business by requesting free, no-obligation price quotes from the following online companies.

Competition between dealers is the best way to ensure you get the best price. You win when dealers compete!

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