The Forex Mini Account is part of the huge Forex market, which is regularly presented to newcomers as being an exciting, vibrant market where it's possible to earn vast sums of money in a short space of time. One of the tragedies about it is that probably most of the people coming into Forex for the first time don't have very much money - that's usually the very reason they're so attracted to the prospect of making it rich quickly.
People who have lost their job or who are in general financial difficulties should really stay away from Forex. The brokers who make so much from new Forex traders throughout the usually brief duration of their trading activities acknowledge that there are inherent risks in trading Forex. In fact they are obliged to point out the dangers by law.
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But so as not to thereby reduce this lucrative source of income, many brokers have now introduced the Forex Mini Account, which, as the name implies, is an account on a smaller scale than a regular account.
What it means, essentially, is that instead of standing to gain or lose a minimum of per point, the minimum gain or loss is reduced to .10 per point. The typical minimum amount required to open a mini account is around 0, though I have seen web sites requiring only . This compares to the regular account minimum of around ,000 to ,500.
So these brokers are doing their best to allow the "smaller guy" into the Forex market to share in its riches. How nice of them. But beware. Brokers are not there to help you make money. There're there to make money for themselves. And they mostly do it at your expense. Why do I seem so hostile towards brokers and their mini accounts? Let me explain.
The unpleasant truth about the Forex market is that barely 5 per cent of new traders survive. Forget about turning into ,000 time and again, which is a typical claim from brokers and purveyors of Forex information. I'm talking about survival. Let's have a brief look at why new traders seldom survive.
The Forex market is extremely volatile. Predicting future movements of any particular currency pairing, for example the British pound against the US dollar (GBP/USD) is very difficult, even for experts. Even if you predict, for example, that the pound will go down against the dollar, and you are right, that doesn't mean necessarily that you will win the trade.
Currency movements seldom go up or down in a smooth line. Nearly all movements are erratic. There'll be a 5 point movement up, and then a couple of points down. There'll be a 35 point move down before it reverses and makes up those 35 points and another 45 as well. This is typical Forex behavior, like it or not.
How does the newcomer with limited capital cope with all this? Brokers offer a "stop loss" system, so you can protect yourself from a sudden movement against you. You fix your own stop loss level, but if you have limited capital you cannot afford to lose more than, say, , on any one trade. On a regular account, trading no more than per point, this means a 50 point stop loss level.
You'd be surprised how easily and often a currency pair can move 50 points in the "wrong" direction. And quickly, too. And many novices have stop loss levels of much less than 50 points. I've seen courses recommend no more than 20 points for a stop loss level. In the Forex marketplace this is simply insane.
Contrast this with the amount of profit targeted. How many points does the average new trader aim for before he closes his trade and takes his profit? Most courses and ebooks, with their wonderful foolproof systems, fudge on this issue. The result, more often than not, is that new traders regularly take losses of up to 50 points, while only occasionally making gains of 20 points or more.
How does the Forex mini account tackle that problem? Only by reducing the amount that the new trader is liable to lose before realizing that Forex is not for him. That, of course, is a good thing as far as it goes. But if it were not for the mini account then many new traders would be saved, due to lack of enough money, from losing any money at all. The ultimate beneficiaries of the mini account are the brokers. They scoop up the "small guy" for all he is worth instead of missing out on making any money out of him at all.
So if the only currency trading account you can afford to open is a mini account, you might want to consider keeping your money instead of handing it to your broker on a plate. Leave it to the big players with hundreds of thousands in their accounts and who can afford large stop loss levels in order to ride the volatility, and who keep away from day trading.
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