Forex trading's appeal comes from its low initial capital requirement that's afforded by the margin and leverage offered by brokers. This cheap entry is appealing to the average man on the street and is often presented as a golden ticket for astronomical returns.
Clueless beginners get drawn to currency trading because of this. It's true that $100 is enough to open an account with most brokers, but is that all you need to get serious about this activity? If not, then how much money do you need to start forex trading?
In this post, you'll read the top three things you should consider to determine the appropriate initial capital for trading currencies.
1. Consider the minimum lot size
The minimum lot size that your broker offers will determine how much leverage you are subscribing to upon opening the smallest trade size. And the use of leverage is directly tied to the success rate of your trade.
The optimal leverage for trading currencies, according to research, should not exceed five times the account size. So, if you do the math, a $100 account would already be at a 1:10 effective leverage if the minimum lot size your broker gives you is 1,000 units. In the long run, trading with this much leverage is not conducive to profitable outcomes.
What you have to do is consider an amount that would not precondition you to a risky entry. If you plan on trading micro-lots, your safest bet would be to deposit $1,000 dollars and take a maximum of 1:5 effective leverage, meaning a maximum of 5,000 units.
Or if you have less than that, like $500, you must utilize only up to 3 micro-lots.
2. Trade with something that you would consider as an investment
So you're thinking about a $100 initial deposit for your trading account, but first ask yourself: Is that what you would consider as an investment, or is that amount of money something that you would just gamble away?
Trading with "risk capital" or money that an investor is prepared to lose is something that most professionals advise new traders. But the problem with that is people who have a propensity to gamble would almost always bet all their chips in one fell swoop, i.e., use extremely high leverage in one trade.
It happens because traders think that they can hit a home run in a single transaction, and that comes without taking into consideration the repercussion if it doesn't go in their favor.
Plus, leverage is just too tempting for something that's relatively small for a trader. If you want to see good results, you have to take something seriously.
3. Manage return expectations
When you begin trading Forex, you have to remember that there is this thing called proportion. It's not just in trading, but it's applicable in investing too, and everything else in the world, for that matter, requires a degree of proportionality.
When you buy a share of a company in the stock market, it's only reasonable that you get only a slice of the company's earnings based on the number of shares you own. Owning a business is also the same thing, it'd be stupid to think that you can reclaim your capital after operating just a few days, a few months or even a few years.
Trading currencies is no different.
You have to set your mind that what you can earn from trading is a result of how much risk you are willing to take. It's not impossible to double your capital right away, but it's also possible for you to lose all of it.
When you trade with a $100 or even a $1,000 account, you have to tone down your expectations. That means your dreams of seeing a $200 or $2,000 account from taking one or two trades are far from reality.
Now, that's not to say that that shouldn't be your goal -- in fact, it can be much higher than that, but to get there would require a reliable methodology as opposed to sheer luck.
Trading on a budget
Now, the economy can be rough, and a higher capital might not be readily accessible to you. But then you have to evaluate why you got into trading in the first place.
If Forex trading appeared to you as a solution to your financial hardship or a way to make quick money, then you might want to reexamine those goals.
Trading is not gambling, and if you treat it like one, you'll end up with a probability of success that's the same from that of a casino where the dealer takes the lion's share of wins.
Trading is a skill that requires time and effort to hone and master. If you can't even stay put to read a single article about the global markets, then perhaps you should consider something else.
How much money is needed to trade Forex?
You can virtually start with any amount to trade currencies. Your broker will allow you to open an account even with just $100 or even as low as $50.
However, if you're in it for the long haul and you want to treat trading more like a business, then the considerations listed in this article will surely help you start off on the right foot.
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