Trading Forex with a small account is difficult because it doesn't have the same cushion or room for error as with a larger account.
In fact, account sizes that are not meeting the minimum lot size of most brokers have a higher probability of getting blown up since each trade would already be soaking up high leverage.
But that's not to say that it's impossible to become profitable.
There are certainly ways for you to achieve profitability with a small trading account, but it takes a "calculated" approach (also a ton of patience), and you'll learn why as you read the six practical tips for doing so in this article.
Now, you may ask, "what is a small account?"
Is there a specific figure to define this?
Because the word "small" is relative to everyone.
Well, for the purpose of this article, a "small" trading account will be referred to as a $100 balance or any amount below it.
1. Set the right frame of mind
So, the first thing you must do is set your expectations straight before you start trading with your account.
Here's a better way to put it: don't think you are going to double or triple your funds immediately.
Because even if it is technically possible to do so, it doesn't come without an extra layer of risk.
What you have to do is to comprehend how the market moves.
For example, if you know a currency pair moves less than 1% a day, it would be difficult for you to get a 100% return on your account in one trade -- unless you crank up the leverage.
Industry experts say that an initial capital of at least $20,000 would be ideal for Forex trading.
And there are several reasons why this is the case, but it mainly involves the use of leverage and the level of risk.
You see, with $20,000, you can trade a standard lot (100,00 units) by just using 5x effective leverage ($20,000 x 5 = $100,000).
If the currency pair you're trading (like the EUR/USD, for example) moves 1% or 100 pips against you, you would have lost only 5% of your account (100 pips x $10 per pip = $1,000).
On the other hand, if you only have $100, most brokers won't even allow you to open a standard lot.
And, even if they do, your account would not be able to sustain 10 pips against you with that trade size since every pip is already worth $10 on that lot size.
To make the calculation easier, here is the pip value of each lot size for dollar-quoted pairs on a USD-denominated account:
Do you still want to trade after knowing this?
The point here is not to discourage you from trading a tiny account size but to help you understand that you should be realistic with your expectations.
If you only have a $100 account and get a $5 profit for the whole month, you have to be contented in knowing that you were able to get a 5% return on your investment -- which is not bad at all.
That's still better than gaining 100% in one hour and losing everything in the next hour.
What you should aim for are consistent long-term profits in trading Forex.
Those who shoot for one-time jackpots most often find themselves one-off winners and big-time losers.
If you have trouble calculating pips, this article covers pip value calculation in depth.
2. Use a trading system built for the short-term
For the same reason as having no extra buffer on an undercapitalized account, you would have to resort to strategies that are more short-term in duration.
Because even if you trade the smallest lot size, which is the micro-lot or 1000 units, you could risk losing your entire account in just a month.
Here's an example: You opened a micro-lot trade of the EUR/USD and left it open. After a week, the currency pair had moved 200 pips against you.
And when you logged back into your account, you found that you're down to $80 -- that's already 20% of your account!
At that rate, you can't leave the trade exposed in the market for another two or three months if it continues to go against you.
Soon, you might end up getting a margin call from your broker once it gets down to 40%.
Not only that, but your free margin also goes down, which means that you have roughly a couple of trades left of the same size in your account.
Your remedy around this is to gauge how many pips you can target as your profit and loss in a day.
You can do this by using the reading of the Average True Range Indicator (ATR) on your charting package.
Set a 10-pip target daily
Or, another idea is to set a narrow pip target like ten pips daily.
A 10-pip move is achievable on any given trading day, and you don't need the aid of the ATR for this.
The only thing you have to do is close your open position once it reaches your 10-pip target.
And, once you do, call it a day.
However, to execute this on the safe side, you have to trade only the minimum lot size.
Also, the best time to take this kind of trade is during a trading session when there is low volatility.
Typically, that's the overlap between the Tokyo and Sydney trading sessions.
Or when there's no scheduled economic data release.
If you want to add a stop-loss, it could be set at 5 pips for every trade.
So, on a given month, you could capture 100 to 110 pips with this strategy, even with a 50% win rate.
That would translate to a $10 or $11 profit.
For it to grow, you would only take on a larger lot size once it reaches a certain account balance.
This strategy will be covered in more detail in a future post.
3. Use Leverage Sparingly
If it still isn't clear to you, this is just another reminder to be careful with how you use leverage.
And frankly, the topic of leverage bears repeating.
Do you know that the only reason traders would use very high leverage is that they think a trade will go their way?
Well, that's probably obvious enough, but you see, to think that way is disastrous -- because anything could happen!
Any trade will most likely have a 50-50 chance of succeeding, and that's the best way to think about it.
When you know your chances of losing are equal to your chances of winning, you will be more heedful of your risk.
Therefore, perhaps the optimum way to use leverage with a $100 account is not to use more.
If your balance is only $100 and trade a micro lot, you are already using 10x leverage (1,000 units ÷ $100).
If your account is $20, the effective leverage is already at 50x (1,000 units ÷ $20).
And there is research to prove that traders who use up to 5x leverage are more likely to be profitable than those who use more than that.
Leverage and profitability somehow have an inverse relationship wherein the more leverage you use, the less likely you will become profitable.
This graph illustrates that relationship:
So, if your account is only a hundred bucks, its best to trade only up to a micro lot.
4. Focus on Pips Gained
Trading Forex requires a type of scorecard so you can gauge how well you're doing.
However, if you defer to using dollar figures, it would be inapt.
The reason why dollars gained are a no go when it comes to this is that it incites greed and unchecked risk-taking.
It's also hard for someone with a $100 account to brag about a $1,000 profit in one trade unless that person is fortunate with his vertiginously leveraged trade.
What's better is to keep score using pips.
Why? Because it's a raw and unadulterated number.
It's not magnified by leverage, which means its not a byproduct of extreme risk.
It also sets you up for long-term consistency since it focuses your attention on a scorecard that's generated through a robust trading strategy and prudent risk management.
5. Practice on a Demo Account...with $100?
Another way to accomplish profitability in an undercapitalized forex account is to practice on demo.
Yes, this is probably an old trading adage, and you probably heard this from every broker that you got a chance to speak to.
Here's a phrase you might've heard of, "practice on demo for a good few weeks to a month until you can comfortably trade on a real account."
As you can see, there's nothing wrong with that, and a lot of traders do become profitable on demo for a certain duration.
However, the problem starts when they switch to trading real money.
That's when they realize that the happy days of making two or threefold their equity in the demo is somehow irreplicable on the real account.
But why does that happen?
Well, for a couple of things: demo account size and emotions.
When new traders sign up for a demo account, they'd often pick or get automatically assigned a starting balance that is at least 20x larger than what they intend to deposit.
So, you guessed it, more room to operate.
And emotions are obviously absent in this case because...well, it's not real money.
In other words, who cares?
So, a trade can linger on the negative side for several days comfortably since the demo account's balance will be able to hold it up.
All the trader has to do is wait until it reverses so he can close it at a profit.
And the effect is that the trader would be excited to start the real thing, thinking that it's a breeze to make money.
Hard to do that with $100 or less.
You might be thinking, "oh, so the obvious solution is just open a demo account with $100 virtual money."
But here's the problem, most brokers don't offer a demo account with a balance that low as the minimum is usually $1,000.
An alternative is to use a backtesting software with the capability to do simulated trading like Forex Tester.
Check out the image below:
The screenshot of Forex Tester above shows a clean EUR/USD chart with a fresh $100.
You can then test your strategies with that platform, and even open positions that are more proportionate to your balance and assess the results afterward.
What this will do to help you is set the ground for what you can expect on the real.
It allows you to understand what is truly achievable with your account.
If you want to learn more about Forex Tester, we have a review of it as well.
6. Open a Micro Forex Account
However, when all else fails, and it's hard for you to follow the four tips above, use a micro account.
A micro account is a type of trading account that allows you to trade less than 1,000 units, and that same 1,000 units is treated as the standard lot size.
With it, you can trade as low as 10 units.
For example, your account's base currency is USD, and you traded the EUR/USD, each pip on 1/100th of 1 standard lot (on the micro account) is only $0.001.
This benefits you because it helps you lower your leverage from being automatically set at 10x on a regular trading account to no leverage at all with a micro account.
Also, when it comes to risk management, you can set a 1% risk per trade without constricting pip targets.
Because on a regular trading account, a 10-pip move on a micro lot (1,000 units) is already 1% of your account, but on a micro account, a 10-pip move (on a 10-unit trade) is only $0.01 ($0.001 x 10 pips).
The math can be dizzying, but the main point is with a micro account, you'd have more buffer since it effectively makes your trades more "proportionate" to your account size.
One of the brokers that offer Micro Accounts is XM, but they don't offer their services to clients from the U.S., Canada, Israel and Iran.
The key takeaway
The only way to become profitable in trading Forex with a small account is to first accept that you are not going to make $500 or even $200 right away.
Once you manage to come into terms with that fact, then the next step is to grasp what's possible.
Recall that doubling your account isn't far-fetched, but attempting to do so carries more risk because you'll tend to use more leverage.
If you are serious about trading and long-term profitability is your goal, then it's best to treat your account as a way to make small but consistent returns every month.
A modest trading account can't make you millions, but if you learn to trade properly with it, you will fare well when you handle a much bigger account size.