The forex market presents retail investors with one of the most accessible avenues to the global financial markets. This is primarily because of the limited restrictions compared to other markets.
Unlike in the securities markets where retail day traders are required to maintain a minimum account balance of $25,000, there are no such legal requirements in the forex market. As such, this makes it easier for traders with limited capital to trade currencies online and make a regular income to supplement their other income streams.
So, how much exactly do you need to begin making money in Forex?
While entry is simple, it is quite a complex issue when it comes to the amount that is needed to trade forex. Brokers will ask you for a minimum deposit if as low as $100.00, others go even lower to $50 deposit while recently $1.00 deposit brokers have cropped up as well.
Also Read: Forex Brokers with Low Minimum Deposits $5
As such, if the question is rephrased to how much is required to start forex trading, then this would be your answer. As little as $1.00. However, when we twist that a little to what is needed, then we will need to jump into the nitty-gritty.
Factors that can help you determine how much you need to start trading Forex
If you can find an optimal answer to each of these factors, then it will be very simple to come up with the figure that you need to start trading forex.
Your reason for wanting to trade forex
This is one of the most critical points that will determine the amount you will need to start trading forex. For instance, if you intend to make a reasonable regular income from online trading, then there is no point going in with $100.00. If you intend to turn $100.00 into say, $30.00 in daily income, then the chances are that you will lose the entire $100.00 after a few trades.
If you plan to make between $50-$100.00 per day, the recommended initial deposit is $5,000. And even this is on the lower side. It assumes that you will be a very successful trader with a win-rate of well over 70% and risking 1% of your account balance in every trade.
Your experience and expertise in currency markets
This is another important factor that can help you determine how much money you want to start your forex trading career with. The higher the expertise and experience levels, the more you can risk.
However, most people who are looking to begin trading forex barely have the experience to risk a lot of money. As such, starting small is always recommended. Under such circumstances, most traders choose a $500 account, but even this is hardly enough to provide you with a good platform for launching your online trading career.
If you seek the advice of those who tried and failed a few times before finally getting a hang of things, then they will recommend a starting account of $1,000-$2,000.
To understand how this factor affects your trading experience, and therefore, the amount of money you will need to start trading, you need to understand the basics of forex trading. Terms like leverage, margin trading, lot size, and pips play a crucial role in determining the amount of money you need to fund your account.
For instance, assuming that you plan to risk 1% of your account in every trade that you make, then you will be looking at an investment of $1.00 per trade from an account balance of $100.00. This means that you will only be able to trade in micro-lots per trade. A micro-lot is equivalent to 1,000 units of trade. Therefore, you would have to take a higher risk of say, 10% of your account in order to make a meaningful return per trade.
Also Read: How to Start Forex Trading with $100
This implies that if you are looking to avoid taking high risks, then you would probably up your account balance at least 10-times to $1,000.
This is a common field in the investor profile form that every trader is asked to fill while signing up for a forex trading account. Most online forex brokers list annual income levels in groups. For example, <$25,000, $25,000-$50,000, $50,001-$100,000, $100,001-$250,000 etc.
The reason behind this field to try to help traders risk only what they are prepared to lose. For instance, you cannot open a forex trading account of $25,000 if your annual income is $25,000. In fact, it is recommended that you risk only a maximum of 10% if you are a beginner. And that’s after you have comfortably covered all your recurrent expenditures. Some even go as far as trading with money that is left after expenses, savings and other low-risk investments.
As such, it also depends on how you plan to split your investment income between fixed income, retirement benefits accounts, stocks, and online forex trading. Depending on your age, it could leave a very small figure for forex trading. Those closer to retirement will likely dedicate most of their investment income to fixed income and IRAs while the younger generation will gravitate towards the riskier forex market, which is also likely to offer higher returns.
In summary, forex trading is a market that continues to divide opinion. Some investment advisors will highly recommend it while others tend to shy from it. As such, it ultimately comes down to the individual investor. This means that the decision on the amount you plan to invest is eventually made by you.
Advisors will guide you, provide both sides of their arguments, and the pros and cons. But it will always come down to being able to provide answers to the factors discussed in this write-up. There could be other diverse determining factors but ideally before you choose a $1.00, $50.00, or $100.00 forex broker, beware of how this will affect your risk appetite, level of income, and the role that your experience and expertise could play.