A recurring question among beginning traders and one that does not have just one answer is how much money do you need to trade in Forex?
The question itself points to the huge hole in the knowledge of aspiring traders. Let’s briefly investigate this approach, while trying to understand all the things we need to know before we even approach an answer of how much money do we need to invest in Forex?
These are the things you should consider:
- What are your reasons to start operating? Are you looking for a primary or secondary source of income?
- What are the investment limitations imposed by your Forex broker?
- How much can you afford to invest in your purchase transaction?
- What is your personal attitude towards taking risks and how much risk are you willing to assume when intermediating?
The first big question on your journey to become a financial operator is why you want to trade. Whatever your objective is, it is vital that you express it clearly, even if only you know it and no matter how trivial it may be. A clear objective will help you focus on the answers to future questions. Without an answer to the why, you will not be able to decipher how much money you need to trade in Forex.
How determined are you to make purchase transactions? Are you looking to raise a large long-term sum or are you looking for an income or both? How much time are you able and willing to commit to learning about Forex? Have you received any type of training? In general, experienced traders advise beginners to be cautious and say it is better to start with less money and more education.
Nobody is born being a trader but many people have managed to become one. Start by resting a few minutes and give yourself time to brainstorm, write your thoughts on a piece of paper and turn it into the first page of your trading diary. From these answers you will be able to know «how much money do you need to trade Forex?» to make a living. If you give income a higher priority, you probably need a larger sum of money. This has to do with keeping risks under control, sooner rather than later.
A psychological factor is also at play here. Research shows that the amount of investment capital can affect your purchase and sale operation. When there are large balances traders have to be more cautious and analyze the market for longer before executing an order, there are fewer transactions in a period of time and the use of the leverage account is more measured. There are also player type traders who are unconcerned when operating large sums.
Your broker wants you to invest
How much money you should have to open an operating account varies according to the broker and the account.
When browsing through the brokers and the different sales accounts, you will notice that the minimum deposit is mentioned more often and not what is the maximum. The reason is simple, your broker wants you to invest as much as possible because there is hardly a sum that you can not handle.
So, what is the minimum amount?
With some brokers there are no deposit accounts, so you basically do not need funds. You only need to register and you will have a «for life» purchase account with a free initial amount of $ 25 to $ 50 USD. Naturally, you can only make a withdrawal after having negotiated a specific volume. However, it will be an active account. Obviously, these types of accounts are there to attract inexperienced and insecure traders who ask themselves «at a minimum, how much money do I need to trade Forex?» and they decide to opt for the option that apparently has no risks.
There are micro accounts that allow you to operate with only $ 10 using micro lots or 0.01 lots per transaction.
There are standard accounts that have a minimum deposit of $ 10 as a requirement. They often have multiple uses and can be used to trade a wide variety of financial instruments other than the currency pair.
There are foreign exchange purchase accounts with an amount of $ 500 USD or more with additional spreads (difference between prices of supply and demand) reduced.
In general, you will be more attractive as a client for a broker while more money is willing to invest and therefore, the more attractive trading conditions offered by the account, but do not buy with eyes closed.
There is also the issue of how much money a trader can use to start trading with Forex.
Not all money is good for trading. The funds you can not afford to lose should not participate in any kind of market speculation because of the implicit financial risks. Neither your pension funds, the mortgage or the costs of teaching your children are an option. It might be wise to refrain from borrowing money to trade with them.
Why trade only with venture capital? Well, aside from avoiding the financial risk that your buying operations can create for your life and the lives of those you love, you should consider using venture capital only for your own trader’s peace of mind.
Every book on negotiation psychology will tell you that professional buying and selling operations are fairly impartial and that a trader has to take it easy at all times: when analyzing the market, when placing orders, when he has losses and even when he has earnings.
A professional in buying and selling operations is cold when calculating, does not get excited about the profits, does not feel anxious about losses, does not bet or performs guessing games. It’s all analysis and calculations.
Will he be able to stay calm and be impartial while watching his mortgage funds disappear before their eyes? Hardly. You will be thinking about the possible consequences and not buying operations. Ironically, pure distraction could become the very reason for the loss.
An even greater danger would be, perhaps, to invest what it can not afford to lose and win. Because in a blind impulse of confidence, that could lead you to want to double the investment only to lose twice as much. Luck remains its only methodology.
Here is a rule for you: just invest the money that in case of losing will not harm your life or your psyche or those you love.
Risks and Expectations with the sales transactions
How much money are you planning to make in a given period of time? Think of a number per month and per year.
In general, ambition is good, but when it comes to buying and selling operations unrealistic expectations can cause pressure, biasing your perception of the market and ultimately, provide poorer business performance.
The important thing here is not how much money you need to trade Forex, but rather how much money you need to open a Forex account and trade securely.
The more you want to earn, you will need to invest even more in order to keep the risks at the same level.
The level of risk is decided by the traders and works as follows.
Let’s say you do not plan to risk more than 1% of your account balance in a single operation, which is quite reasonable. If your account has $ 1,000 with a leverage of 1: 100, that means you can only risk $ 1 per transaction. In the forex market this means that you can take a position of 1 micro-lot or a lot of 0.01. This will set the value of the pip at around $ 0.10 cents. In addition, to stick to a 1% risk level you can not afford a decrease below 10 pips. A major problem with purchase transactions with few funds and with a strict risk ratio is the lack of flexibility in the choice of trading styles. You are practically confined to active operations within the day.
What happens if you do not have the time or the stomach for this type of negotiation?
Undoubtedly, the risk quotient may increase, but as a general rule, safer trading styles favor your account more slowly. Most traders do not want to make a couple of dollars a day and the market encourages them to increase trading volumes or the number of trades opened at the same time. This may work in the short term, but usually results in a $ 0 balance in your account.
So, what would be most suitable for his great ambition? Save more money before opening a Forex account. By properly financing your account you can get benefits while keeping your risk quot under control.
Every trader has the dream of opening a small account and becoming a millionaire in a few months. In theory this is possible due to the high level of leverage, but statistically speaking, it is very unlikely. The reality is that it is not feasible if you operate with a small account. Although profits can be accumulated and capitalized as time progresses for beginners this is too slow and they feel forced to use large amounts of leverage or to negotiate with larger and higher risk volumes to be able to increase their accounts more quickly.
Professional fund managers usually make less than 10-15% per year. Traders who handle small accounts often assume that in a year they can double, triple or even make 10 times more money than fund managers. A vast majority does not, and in the process of realizing this, they end up abandoning buying and selling operations when a good amount of money has already been spent.
Intermediation is about getting rich consistently instead of getting rich quickly. Lack of education, unrealistic expectations and lack of financing are the main sources of risk in foreign exchange operations.