There are several critical and challenging factors in relation to trading that can severely harm a trader’s potential trading success and prosperity. And if you fail to address the challenges, or ignore the impact these factors can have, the effects can be disastrous.

Overtrading, trading without a plan, being inexperienced, only having a thin grasp of market mechanisms, not understanding how fundamentals move our FX markets, these are just some of the barriers we can impose on ourselves, directly limiting our potential. The subject of trading from an under capitalised account is never discussed enough in trading circles, despite this crucial factor being a considerable block to progression.

The FX market, whether traded on a part time basis, or as a full time self employed activity, should be approached with professionalism. That professional attitude should be extended to trading with an account that allows the trader the freedom to function effectively in the market place. Whilst you know that you’re betting on markets, you shouldn’t adopt the various bad practices, associated with other betting industries.

You shouldn’t take punts, instead you risk a proportion of your account size per trade, after analysing your markets, using both fundamental and technical analysis. You don’t bet on hunches and you don’t suddenly decide to take a punt on the movement of a currency pair because you have a few spare dollars or Euros. Instead, as a professional trader who has self respect and who respects their industry, you plan everything in advance. Because you agree with the truism that; “if you fail to plan, you plan to fail”.

One simple, effective method to establish if the account size you’re trading is sufficient for your ambitions, is to firstly decide what targets you have for your trading. Are you looking to supplement your full time income, or are you looking to trade full time? The majority of traders are part time, generally swing or day traders, looking to supplement their income. Many have an ambition to reach a point of success and profitability, which will eventually allow them to become full time traders.

Let’s base our calculations on the premise that you’re a part time trader, a swing or day trader, who will trade EUR/USD exclusively. You have €5,000 to trade with, you now need to establish if it’s enough capitalization to trade effectively. And if so what parameters should you attach to your trading, in order to ensure you’re not trading from an under capitalised position? And what targets could you realistically attach to your trading, to achieve your ambitions? We’ve selected a figure of €5,000, as it’s the upper band of the €3-€5K average deposit/account size figure, which many brokers refer to as the deposit their clients hold with them.

As a trader only speculating on EUR/USD exclusively, you’ll enjoy some of the tightest spreads available, whilst the slippage and poor fills you experience should be significantly reduced, due to the increased liquidity available for the most traded currency pair globally 24-7. You can trade this security, through an ECN/STP trading model, safe in the knowledge that the conditions you’re trading in are as good as it gets. You have to now decide what risk to take on each trade, in relation to your account size.

If you’re prepared to risk 2% account size per trade as a swing trader, then you’ll be risking €100 per trade. For swing traders this is generally considered to be an acceptable level of risk. If you’re a day trader, taking several trades on EUR/USD per day, you may prefer to risk 0.5% account size per trade, therefore, you’ll be risking €25 per trade. The risk per trade has now been established, what returns should you aim for?

The account growth you aim for is often a contentious subject in the retail trading world, with many market commentators in the mainstream financial media, neglecting to understand the key difference between investing and trading. You’ll often see criticism that trading returns are way too optimistic, when traders report they’re aiming for gains of perhaps 50-100% per year. However, for successful traders such a return is neither delusional, or out of reach.

Many article writers will compare investment returns to trading returns when the two phenomena are mutually exclusive. Aiming for 1-2% return per week, is an entirely realistic proposition for traders who put their funds to work. Therefore, if you consider your original $5,000 account size and you’re aiming for 2% annual growth as a swing or day trader, you’ll be looking to double your account size to €10,000. If you dial down your ambitions and your risk per trade, you may instead aim for 50% account growth per year, which is roughly 1% gain per week.

Such targets are realistic and achievable, for proficient and disciplined traders, operating either full, or part time. The examples outlined illustrate that your capitalization should be directly related to your risk per trade and your target growth. The illustrations also provide evidence that any level of capitalization (in theory) allows you to trade effectively, if your broker allows you to take positions risking only, for example, the €25 per trade highlighted in the article.

However, the likelihood of achieving returns of any size will be enhanced if you stick to the parameters outlined, details that you’ll have embedded into your comprehensive trading plan, a plan which you’re continually perfecting, based around the trading discipline you’ve also developed.

Content Source: Mr. Asim from Forex Trading Dubai has contributed in this article.