FOREX question: What is the advantage of having a ‘standard’ account over a ‘mini’ account?
Thursday, May 28th, 2009 at
6:48 pm
this broker offers 200:1 for minis, but 100:1 for standards.
I don't think I'll actually try more than about 50:1, but w/e, so is lot size of 100,000 considered and advantage because you don't have to get bas busy to place orders? There must be a more signoficant reason to differentiate between the two accounts.
Maybe the spread gets better?
Maybe insterest rates are better?
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Filed under: Forex Mini Account
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Even though I trade fx, the leverage part always kind of baffled me. Leverage determines how much margin you need to put up. For example in a std. account, 1 lot = $100,00, so a leverage of 100:1 in a std. account means $1,000 margin per lot. On a mini a lot is $10,000, so leverage of 200:1 is $50 per lot.
Let's break it down. Let's say you have a $100,000 std. account with leverage of 100:1. Say as a rule, you only commit 5% of your acct. equity to a trade. So, on a $100k std. acct. you'd commit at most $5000. At 100:1 leverage (or $1000 per lot), that's 5 lots you can trade. On a std. acct. 1 Pip = $10, so on a 50 Pip move you have 50 Pips x $10/pip x 5 lots = $2500 or a 50% return on the trade.
On a mini account of say $10k, a 5% commitment would be $500. With 200:1 leverage (or $50 per lot), you can margin 10 lots. In a mini account 1 Pip = $1, so a 50 Pip move is 50 Pips x $1 per pip x 10 lots = $500 or a 100% return on the trade. Even though the $$$ profit is smaller ($2500 std. vs. $500 mini), the percentage return is greater (50% std. vs. 100% mini). So in a nutshell, the percentage return is higher. On thing you must remember $10/Pip on a std. or $1/Pip on a mini only applies to a currency pair that the U.S. dollar is in and only in the case where the USD is the quoted currency, such as the GBP/USD, EUR/USD, etc. (The first currency listed in the pair is the base currency and the second is the quoted currency). Where the dollar is the base currency, the dollar value per Pip is based on exchange rates.
Let's take another example. between 11/17 and 12/1, the GBP/USD moved 928 Pips. So let's say you bought the Cable (GBP) using the above account sizes and leverage with committing 5% of the account equity to the trade. On the std. account, 5% is $5000 with $1000 per lot margin would give you 5 lots. At 928 Pips, you would make $46,400, or 828% return on margin (46.4% increase in account equity). On a mini account, its' $500 with $50 per lot margin or 10 lots. A 928 pip move is $9,280, or 1,756% return on margin (92.8% increase in account equity). In other words, the dollar returns were higher on the std. account, but the percentage returns were higher on the mini account.
But beware, the higher leverage works both ways. Hope this helps.