-
Organization
- CommuniTrade
- Dispute Resolution
- UnityGains
-
Resources
All forex traders dream of growing their capital. After all, you're trading foreign exchange to secure a financial future.
But you won't be able to do it without capital. So, the question is: how much do you really need to start trading forex?
Should you put a large sum of money in your trading account? Or is it okay (and profitable) to start conservatively with a small amount?
Read on this lesson and learn how much capital you need for forex trading.
Forex trading is highly lucrative. This is one of the reasons why this financial market is the most heavily traded.
However, there are other aspects of trading that you need to invest in—aside from your actual trades. This way, you can rest assured that you're on the winning side of online trading.
Online trading is a high-stakes, risky environment; thus, no traders should enter online trading uneducated.
Learning online trading is essential as it provides you with substantial advantages and helps you set a strong foundation for success.
Remember, paying for trading courses is optional. There are several free online trading courses you may find online that are as comprehensive and reliable as the paid courses.
Take time to educate yourself on the market basics, including its volatility, essential terminologies, trading strategies, and effective risk management techniques.
Your broker's requirement capital deposit is another thing you need to get out of your pocket.
Several retail brokers allow traders to open a trading account with a deposit as minimal as $25. However, this is simply ineffective and even risky because you don't have enough funds in your trading account to support your open trades and weather the market volatility.
Assume you're a new, uninformed trader. You saw an ad about a broker that allows traders to open an account for as low as $50. Optimistically, you register with the broker with the desire to place a trade immediately.
After successfully getting your $50 trading account, you analyze the market and find that the EUR/USD is a buy based on the prevailing support and resistance level. So, you entered a long EUR/USD position at 1.2300 market.
However, you failed to consider the short-term volatility of the market. Just a few minutes later, the EUR/USD cascaded to 1.2290. With a 10-pip movement against your position, you now have a floating loss of $100.
Because your floating loss is now twice your trading account, your broker liquidated your position to prevent you from further losses. You've wasted your $50 while owing your broker $50 in your trading account. The bad news? The market continues trading at the support and resistance range, and you should be raking the profits if your trading account manages to weather the market volatility.
What does this tell you? Losses are always there when you're trading.
You need to put up a safety cushion to ensure your trade has a fighting chance to survive and profit from the market.
Your broker's trading platform has enough technical indicators for your charting, and some may have complementary news feeds for your fundamental analysis. However, you can subscribe to higher-end charting software to help you better analyze the technicalities of the market.
Also, accurate and instantaneous news feeds would change how you trade during news releases and other essential economic data.
These trading platform plugins and news feeds may be a one-time payment or recurring; they often start at around $100 per month. They may be expensive, but this will give you an advantage in forex trading.
Okay, enough with the initial considerations before you actually start trading. By that, I meant the actual buying and selling currency pairs.
Again, you can start with as little as $100 because several forex brokers allow new traders to open a trading account for as low as that. But as I've mentioned, this is just a capitalization mistake because you'll end up wasting your capital.
A more realistic amount would be $500 to $1,000 to provide a cushion against market volatility.
After you've finalized your trading capital, you should now choose which lot size you should open. Remember, your position size selection must be based on your trading account capital.
A common rule of thumb is to risk no more than 1-2% of your trading capital on a single trade. This helps to manage losses and preserve your capital.
Suppose you have a $1,000 trading account, and you only plan to risk 1% of your capital on all of your trades. With this, you'll only invest $10 every time you open a trade.
"$10? Is that enough to be profitable?"
Well, if you're only trading $10, then no. It would take you forever to run at a substantial profit with that $10 trade. However, you can always leverage your trade.
Once you've leveraged your trade, you’re margin trading where you control a big trade position using a relatively small capital. After all, leveraging your trade means you're magnifying it.
Leverage is basically a multiplier for your buying power. It's expressed as a ratio, like 100:1, representing the position you can control (100) with a small capital (1).
Still confused? Here's a practical example:
Sean has a $5,000 trading account. However, he only risks 2% of it to make his trading sustainable. With this, every trade he opens only has a capital of $100. But Sean knows that a $100 trade would get him nowhere. So, he started leveraging his trade.
Currently, he has a leverage of 100:1. With $100 capital and 100:1 leverage, he can control a trade position worth $10,000 (100x100). This buying power gives him better market exposure, essentially allowing him to profit even from a small price fluctuation.
However, there's one thing you need to remember: leverage is a double-edged sword. While using leverage magnifies your potential returns, it also increases the potential risk for your capital.