How Much Money Do I Need to Start Trading Forex?

28.01.2020

Although some Forex brokers will let you start trading with as little as $1, you will need to deposit at least $12 with a broker offering nano lots or $120 with a broker offering micro lots in order to day trade safely. The amount of money you need to start will depend upon your broker’s:

  • Minimum deposit requirement

  • Minimum trade position size

  • Maximum leverage

  • and your:

  • Risk management strategy

  • Trading style / average stop loss required

  • Overall financial situation

  • How much money can you make trading ForexIn order to trade Forex effectively, you need a Forex broker. Trying to trade Forex using a regular bank account or a money changer is too costly and slow to be a realistic option. So, the starting point to answering this question is, what is the minimum deposit required by a Forex broker?
    Forex brokers won’t let you trade with real money until you have deposited their required minimum deposit, which these days is usually about $100. However, there are Forex brokers that require no minimum deposit at all, so theoretically you could start trading Forex with as little as $1. Unfortunately, if you try to trade Forex with such a small amount of money, you will quickly run into several problems, starting with minimum position sizes and maximum leverage.
    Forex Broker Minimum Position Size and Maximum Leverage
    The vast majority of Forex brokers will not let you make a trade sized smaller than 1 micro lot (0.01 lots) which is worth 1,000 units of the base currency. For example, 1 micro lot of the USD/JPY currency pair is worth $1,000. This means that you will need leverage in order to make any trade in the USD/JPY currency pair with a deposit of less than $1,000. If a broker offers a maximum leverage of 30 to 1 on this currency pair (typical in the European Union), you will need to deposit at least $33.34 just to make one trade in USD/JPY. If maximum leverage of 50 to 1 is offered (typical in the United States), you will need to deposit at least $20 to make a trade in USD/JPY. If maximum leverage of 500 to 1 is offered (typical in Australia), you will need to deposit at least $2 to make a trade in USD/JPY.
    Just because lots of leverage is offered to you as a trader, does not mean that it is wise to use it. The minimum amount of money you need to make just one trade in Forex is determined by:

  • The maximum leverage offered by your Forex broker in what you want to trade (leverage varies from asset to asset and country to country); and

  • The minimum position size you can trade with your broker in what you want to trade (this is usually 1 micro lot).

  • There are a few Forex brokers allowing trading in a minimum position size even lower than 1 micro lot. This lower size is 1 nano lot, which is equal to 0.001 lots. Continuing with our example of placing a trade in the USD/JPY currency pair, 1 nano lot would be equal to a position size in cash of $100, so with leverage of 100 to 1, a deposit of $1 would be enough margin to open that trade.
    Forex Brokers Offering Nano Lot Trading
    FXTM is a regulated Forex broker offering trading in nano lots. Their highest maximum leverage offered is 1000 to 1 and their minimum deposit required is $10. There are several other brokers also offering trading in nano lots. Oanda, for example, takes it even further and allows you to place a trade with a position size as low as $1 or 1 unit of any other base currency, meaning you can trade with $1 without using any leverage.
    So far, we have considered only broker-imposed limitations affecting how much money you need to start trading Forex. We still need to consider the issues of risk management, stop losses, meaningfulness of profits, and different types of trading styles, all of which are important factors in answering this question.
    How Risk Management Affects Deposit Size
    We looked earlier at the minimum amount of money you need to enter just one trade. Yet Forex trading involves taking a large number of trades. Even a position trader who might aim to stay in winning trades for a few weeks or even a few months would probably expect to take at least ten trades over a year, and shorter-term traders such as swing traders or scalpers many more trades than that.
    Forex trading involves losing trades. There is simply no way around that: any trader, even the very best Forex trader, will lose at least one third of all the trades he makes. It is well known that winning and losing trades are not evenly distributed: markets tend to go through winning and losing streaks. This means that every trader should plan for a worst-case losing streak of at least twenty losing trades in a row. Every trader should also plan for their worst drawdown (peak to trough account decrease). Once your account Is down by more than 20%, it gets harder and harder to get back to the peak, because the gain required to achieve it rises exponentially. For example, if your account is down by 50%, you need to make 100% from what remains to get back to where you were before the 50% loss.
    Let’s assume you don’t ever want your trading account to be down by more than 20% and your worst losing streak will probably be 20 losing trades in a row. This means that you should risk no more than 1% of your account per trade. But wait – you may only ever lose 20 trades in a row, but it is likely that your net losing trades within any major drawdown will be approximately double that, with a few winners mixed in. This implies that you probably should risk no more than 0.5% of your account on a single trade. Therefore, if you are going to need due to minimum position sizing, leverage, and trade stop loss requirements, say $1 for a single trade, you will have to multiply that by 200 to come up with the minimum amount you need to trade Forex. You are also going to need to think about how big your typical trade stop loss is going to be.
    As well as losing streaks, traders have to worry about a wild, sudden price movement causing massive slippage beyond a trade’s stop loss. This usually only happens with pegged or manipulated currencies, such as the Swiss Franc in 2015. This is another reason why it is usually a good idea to risk only a small percentage of your account on any single trade. It should also help to trade liquid major currencies such as the U.S. Dollar, Euro, and Japanese Yen.
    How Stop Losses Affect Deposit Size
    You should never enter a trade without inputting a hard stop loss. The hard stop loss tells your broker that when the trade has gone against you by a certain amount, to close the trade immediately. Although the stop loss will not always be executed at the exact price given when markets are volatile, it is a useful and very important way to limit your risk and control your losses.
    Stop losses should always be determined by technical analysis, not by how big a stop loss you can “afford” due to the amount of money in your trading account.
    For example, say you want to risk 0.5% of your account on a trade, and you want your typical stop loss to be 100 pips. The smallest trade position size your broker allows is 1 micro lot, which on a USD based currency costs $0.10 per pip. This means that your 100 pip stop loss will require that you risk 100 X $0.10 which equals $10. You want this $10 to be no more than 0.5% of your account – and that means you are going to have to make a deposit of $2,000 to start Forex trading with enough money to make 100 pip stop losses work, if your broker only goes as low by size as micro lots.
    Don’t ever make a stop loss smaller than you really want it to be just because you can’t “afford” it with your account size. Either put more money in your account, find a Forex broker that allows trading in nano lots, or consider switching to a style of trading which typically requires tighter stop losses. The three styles of Forex trading are position trading, swing trading, and scalping, and we’ll consider them each in turn.
    How Much Money Do I Need to Position Trade Forex?
    Position traders look for trades which take several days or even weeks or months to complete, and so usually need to use stop losses of about 100 to 150 pips. Assuming you don’t want to risk more than 0.5% of your account on any trade, and that you will never lose more than 20% of your account, you should start with a deposit of at least $2,500 to $3,750 at a Forex broker offering trading in micro lots, or at least $250 to $375 at a Forex broker offering nano lots.
    How Much Money Do I Need to Swing Trade Forex?
    Swing traders look for trades which take from between about one to eight days to complete, and so usually need to use stop losses of about 30 to 60 pips. Assuming you don’t want to risk more than 0.5% of your account on any trade, and that you will never lose more than 20% of your account, you should start with a deposit of at least $720 to $1,440 at a Forex broker offering trading in micro lots, or at least $72 to $144 at a Forex broker offering nano lots.
    How Much Money Do I Need to Scalp or Day Trade Forex?
    Scalpers or day traders look for trades which take only seconds, minutes, or perhaps a few hours at most to complete, and so usually need to use stop losses of about 5 to 10 pips. Assuming you don’t want to risk more than 0.5% of your account on any trade, and that you will never lose more than 20% of your account, you should start with a deposit of at least $120 to $240 at a Forex broker offering trading in micro lots, or at least $12 to $24 at a Forex broker offering nano lots.
    Can I Start Forex with $100?
    The calculations discussed above show that it is absolutely possible to trade Forex safely starting with an initial deposit of $100, if you use a Forex broker offering nano lots or smaller, and you are day trading, scalping or swing trading.
    Is It Worth Trading Forex with a Low Minimum Deposit?
    A final issue to consider is, even if you can trade Forex safely with a small amount of money such as $50 or $100, is it really worth it? It all depends how much these sums of money mean to you and how much time and effort you are going to put into trading Forex.
    For example, let’s say you double your money in a year. This is a great result for any trader and will probably take a lot of work. Yet if you start with $100, you will only have $200 after this great result. Maybe it isn’t worth it if you can, for example, save that amount of money by making other changes in your life (such as saving more) without putting your capital at risk. It might be smarter to wait until you have a bigger amount to start with, because then such profit would be more meaningful to you and feel like it is worth the work you put into making it.
    Nobody should ever trade Forex with money they cannot afford to lose, but you probably won’t stay motivated for long if you trade with an amount of money which is so small and trivial to you that you don’t feel like you care much about the result. You need to find a balance which works for your trading style, your emotional style, and your financial situation.

    Original from: www.dailyforex.com

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