How Much Money Do I Need
to Trade Forex?
Money Do I
Need to Trade
The forex market is the most accessible financial market in the world. You can start trading with an initial investment as low as $50. However, the amount of money you start with is a significant determinant of your ultimate success and will influence your trading experience and just because you can start trading with $50 doesn’t mean that you should.
The minimum amount of money you start with should correlate with your goals. Do you want to make a regular income with forex trading? Do you simply want to grow your small account regardless of how long it takes?
To determine how much money you need to start trading forex, you have to consider your level of risk and the potential risks and rewards of different investment amounts.
The general hard and fast rule is that you shouldn’t risk more than 1% of your capital on a single trade. This puts a risk-based limit on your trade size depending on how much you have in your account.
For example, if your forex trading account has $50, you shouldn’t risk more than $0.50 per trade and if you have $10,000, your maximum risk per trade is $100.
You can see that trading with a small account means you don’t have a lot of funds at your disposal. Even experienced professional traders sometimes have strings of losses and with a small account, you don’t have a big buffer against any unexpected losses or mistakes.
Every forex trader needs to follow sound risk management rules, but with a small account, you have to be more vigilant about managing risk. You have to be especially watchful of your position size and risk/reward ratio and you should use stop-loss orders to cut your losses.
Using Stop-loss Orders
Stop-loss orders are an important element of risk management because the market sometimes moves faster than you can react and the order can mitigate risk when the market moves against your position.
Stop orders help you quantify risk. For instance, let’s say you place a trade in EUR/USD. With a micro lot of 1,000 units, each pip is worth $0.10 and if you place your stop 50 pips away, your theoretical risk will be $5 (50pips x $0.1 per pip).
If you assign this theoretical risk of $5 to a trade and you are only risking 1% of your capital on the trade, your total risk capital is $500.
If you worked with a tighter stop, for example, 20 pips, your risk capital will be even smaller. Using the example above, with a stop-loss 20 pips away, your total risk capital would be $200. Conversely, if you work with wider stops, you will need more risk capital. A stop-loss 100 pips away will require $1,000 capital.
Generally, wider stop-losses tend to lead to trading success faster than tighter stop losses and so your capital investment will depend on your trading goals.
Note: A conventional stop order isn’t guaranteed. In the event of high volatility, your trade may be subject to slippage. Forex slippage occurs when a stop-loss order closes at a different rate than the one that’s set. Don’t forget, a stop-loss order doesn’t mean that a maximum loss is set in stone, but it does provide a useful idea of your risk under normal conditions.
Obviously, the reason forex traders get into forex trading is that they want to make money out of it. While you can make money after starting with a small account, you are likely to make better gains if you have more capital in your trading account.
The biggest problem with starting with a small initial investment is that you are restricted to start with smaller positions. With smaller positions, you get smaller profits compared to those you would get if you traded with larger sums of money. You’ll also be unable to make many simultaneous trades if you have little capital.
Consequently, a small account will grow much smaller than the big one, and at a slower rate. The psychological challenge of putting in a lot of effort for little rewards may be a good reason to consider starting with more than just the $50 or $100 initial investment, otherwise, you may end up demotivated.
With these potential high risks and rewards in mind, let’s look at some capital scenarios involving different levels of the initial investment.
Let’s assume you open an account with $100.
Using the 1% maximum capital risk per trade, you’ll want to limit your risk on each trade to $1. If you’re buying or selling one micro-lot, each pip is worth $0.10 and this means your stop-loss order is restricted to within 10 pips of your entry price.
If your stop-loss were to exceed 10 pips, your risk would be more than you want. For instance, if your stop-loss order is 10 pips away, your risk would be $1.10 (10 x $0.10).
As a general rule, most forex traders use a risk/reward ratio of at least 1:2. Let’s say that you use this minimum ratio, you’re risking $1 per trade to potentially make $2. If you are a day trader and you average five trades per day, you could expect to make about $10 per day of trading.
However, this is assuming that you win 100% of all the trades you take. Let’s say you have 20 trading days a month and you win only 50% of the trades you take, you would hypothetically be making $5 a day and $100 every month. This is before you pay your forex broker fees and commissions.
You can see how starting with only $100 severely limits how you trade forex. By risking a small dollar amount, you only make small gains by extension when the price moves in your favour.
Now, let’s assume you open an account with an initial investment of $1,000.
With a $1,000 account you can risk up to $10 per trade and you have more flexibility. You can buy multiple lots. For instance, you can have a stop-loss order 10 pips away from your entry price and buy 10 micro-lots and still be within your risk limit (10 pips x $0.10 x 10 micro lots = $10 at risk).
You can also have wide stops. For example, if you have a stop order 50 pips away from the entry price, you can buy two micro-lots (50 pips x $0.10 x 2 = $10 at risk)
You can even buy a mini lot, where each pip is worth $1, and still, be within your risk limit. Although you’ll have tighter stops since you won’t be able to exceed 10 pips, with a mini lot, you increase your trading volume and so your potential for bigger rewards also increases.
Using the 1:2 risk/reward ratio, an average of 100 trades every month, and a 50% win ratio, you can expect to make about $1,000 a month before fees and commissions. You can see that starting with a $1,000 deposit will give you more trading flexibility and produce more income than starting at $100.
Of course, these figures are all hypothetical and most traders who start with $1,000 will likely be making only $10 to around $30 a day with any regularity.
Starting with $5,000 will give you even more flexibility compared to starting with $1,000.
With $5,000 you can risk up to $50 per trade. Let’s say you buy EUR/USD at 1.1130 and place a stop-loss order at 1.1121, you have 9 pips of risk depending on the pip movement. You can trade in both mini and micro-lots.
For example, with 9 pips of risk, you could buy five mini lots ($50/ [$1 per pip x 9 pips]). These mini lots would give a total risk per trade of $45 and so you could also buy 5 micro lots with the remaining $5 ($5/ [$0.1 per pip x 9 pips]). This would put you within your risk limit at $49.50 total risk per trade.
Continuing with the 1:2 risk/reward ratio, 100 trades a month, and a 50% win ratio, you could, in theory, make $5,000 a month before fees and commissions. You can see that with $5,000 your income potential increases.
In reality, experienced traders who employ robust risk and money management rules can make about $50 to $150 a day depending on their forex trading strategy.
From these different scenarios, you can see that you will require more capital to make bigger gains and possibly get reasonable income from trading. The need for more capital will also depend on your trading style. Some styles require more money to get started than others.
A Look at
You can have tight stops with day trading, however, swing trading requires wider stop losses. With swing trading, you hold a position for a couple of days to a couple of weeks and so you have to be able to withstand wider moves in the market since your position is open for longer. Also, you may have more swap, or rolling fees, to take into consideration.
For swing trading, traders often need to risk between 20 and 100 pips in a trade depending on the forex pair they are trading and their trading strategy. For the following illustration, let’s say you want to take a position with 60 pips of risk. Your earning and growth capabilities will vary depending on the amount of money you start trading with.
Using the maximum risk per trade of 1%, you would require a minimum of $600 to open an account. This would mean only trading in micro-lots. If you risk $6 per trade with a risk/reward ratio of 1:2 and trades occurring every couple of days, you’ll likely only make about $24 to $36 per week. This earning potential is only true if you have a 100% win ratio. At this rate, it can take you several years to add a few thousand dollars to the account.
Continuing from the $600 example above, if you start with $4,000, you could risk $40 per trade. If trades occur every couple of days, you could potentially make about $160 to $240 per week, which is more of an income stream compared to $36. With more money, you can build your account faster and possibly earn more.
Generally, swing traders require more money to start trading compared to day traders. Additionally, position traders tend to require more compared to both day and swing traders. This is because, with position trading, a position may be held for weeks up to several years. It’s only logical that the initial investment is substantial to make reasonable gains in the long run.
You can start forex trading with as little as $50, but it’s important to have realistic expectations depending on how much money you invest. With the minimum investment of $50, you can expect your account to grow very slowly, although it’s highly likely that you’ll deplete all the capital before you make any significant amount of money.
Starting with $500 or $1,000 is usually recommended as these two amounts can at least give you better account growth and the flexibility that a $100 deposit won’t give. If you’re a swing trader, the general recommendation is that you start with at least $1,500.
In the end, it all comes down to finding what works best for you based on how much you currently have to invest and your long and short-term trading goals. How much knowledge and experience do you have? How much would you like to earn? How often will you trade?
You’ll be able to take bigger positions and potentially earn more per trade with a bigger initial deposit, but this should all be weighed against the risk background. Generating profits consistently takes time, discipline and practice under various market conditions.
The best approach is to make a number of trades in a demo account to understand the risks and rewards of trading with certain capital amounts before risking real capital.
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