With advent of technology, there is easy access to global forex brokers, leverage and availability of many trading systems. All these have prompted many enthusiastic individuals to try their hand in forex trading to realize their financial goals. In this context, it is important to realize that for any forex trader, the amount of trading capital that is invested greatly determines the ability to make a profit from their trading activities. In fact, it can be cited as one of the most important factors as even a slight difference in the amount invested can many a time make a huge difference in the profits that are generated. This is because a small edge during trading can be exploited for making a substantial profit only by assuming a large position and having a good many replications of this position. This can be accomplished by the trader only when they are sufficiently capitalized.
Any trader wants to invest a small amount and subsequently generate large amounts of profits from their forex trades. In such cases it is seen that profits accumulate only over a period of time and many a time the traders feel pressured to use high amounts of leverage to increase their profits. This means they are taking on excessive amounts of risks to generate profits. Though it is a fact that professional fund managers generate only about 15 percent as profit in a year, inexperienced traders believe that they can make more profits. Many beginner traders are known to lose a good amount of their money through such endeavors.
A trader should realize that fees, commissions and spreads when factored in eat up a considerable portion of the profits that are generated. Ultimately, a trader has to acquire and use certain skills to break even. It is usually observed that a trader is short by 5% of the initial balance even before they can start earning money through trading. This can be attributed to the cost f entering trades and slippage. If a trader makes a profit of only one tick per round trip, the fees and slippage can be covered. It is important for novice traders to realize this instead of aiming for large profits at start.
Though making a profit of one tick sounds easy, it is actually not so and the failure rate among traders is high. In this context, it is observed that a small account is significantly affected due to commissions, fees, and spreads when compared to a larger account. When a trader assumes larger positions, the benefits are always magnified. On the other hand, assuming large positions with a small account at hand may eventually lead to margin calls.
A trader can make sufficient income by trading five contracts in a day than trading one contract ten times in a day. However, it should be seen that a disproportionate amount of capital is not risked for the purpose.
Leverage is a tool that can be used to generate high amounts of profits. However, the risk is also high when using leverage. Leverage basically allows the trader to assume large positions when compared to what they could assume with their capital alone. It is recommended that traders should not risk more than 1% of their capital on any specific trade. If this rule is followed diligently, leverage helps to magnify the profits that are generated. As an example, if the capital is $1000, only $10 should be risked on a single trade. If the market is volatile, as the stop is likely to be very small, it is better that traders assume positions using micro lots. Traders should avoid the temptation of taking huge risks that would seem to multiply their capital. It is always better for traders to build up on their capital in a gradual fashion by appropriately managing risk. A return of $5 on a $ 1000 capital is equal to 0.5% gain on the capital. This can help to build the capital up over a reasonable period of time.
Strategies To Suit Trading Account Size
It is clear that all traders are not equal when considering the sizes of their capital outlays. However, it is clear that a trader has a significant advantage in terms of additional confidence and increased security with a larger capital outlay. Given below are brief descriptions of some strategies that are possible according to the size of the outlay.
€0 (No capital investment)
For a trader that cannot invest any money, free forex contests may be a method to start off and build up some funds. There are forex brokers that offer No-Deposit bonus and free demo accounts. The trader can study the market and refine their trades while getting ready to roll out the capital investment.
€100 – €250 (Small Investment)
This is a common amount that many traders start their forex trading career with. The smallest lot size being 0.1, some risk has to be taken when orders are placed. It is possible for the trader to build up the account with successful scalping. Resorting to conservative swing trading is recommended for the patient starter traders that want to build up their profits gradually.
€1000 – €5000 (Medium Investment)
It is common for speculators to have this amount as capital investment. When a trader has this amount as his capital outlay, it is possible for the trader to make a good amount of profit without taking an excessive amount of risk. Traders who invest this amount of money usually resort to techniques such as day trading or swing trading. It is a good idea for such traders to try automatic trading with Expert Advisor facility.
€50000 and Above (High Investment)
Such traders are every forex broker’s dream client and they are usually pampered by the brokers. Most of the facilities of the trading platform are open to such traders. The trader can try any strategy and a skilled trader with this kind of a capital outlay can quickly win trades and multiply profits.
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