In the case of all types of investments, including day trading, you can easily lose your money quickly and easily if you are undercapitalized. Most successful traders never start investing with just about $100 in their trading account. Forex brokers that offer high leverage may try to make you believe that you need not have a large amount of capital to start trading. However, it is important that you start with some amount of capital in order to succeed as a forex trader. In this post, we will discuss as to build your account balance even if you are under capitalized. One aspect you should keep in mind is that the rate of return would be a little slower. This means that you should exercise some amount of patience in receiving the desired rewards.
One of the common misconceptions that most forex traders start with is expecting to make 50 percent returns straight away. This is not very easy at all. If it was so, many traders would have already become millionaires. Trading gurus that sell courses and strategies may promise you riches, but the reality is totally different. This is because the markets may behave in an irrational manner at times, increasing the risk. If you have only a small amount of money in your trading account and want to succeed, you must be disciplined and patient. Rewards will come to you gradually. Running after unrealistic returns could put your trading career in jeopardy.
Most traders look forward to having large capital for trading, but in reality many people will be able to keep aside only about $500 to $1,000 for trading. Ideally, you must have a minimum of $10,000 in your trading account to earn some decent returns. However, you must understand that getting even a 5 percent return from currency trading is a great achievement. A 5 percent return on $10,000 amounts to $500, while it works out just $50 when you invest only $1,000.
Traders become impatient when they receive smaller returns and start taking more risk. They justify their action by assuming that if they have been able to achieve a 5 percent profit, they should be able to a higher rate of return as well. Sooner or later, the markets would humble them and eventually leave them with just about a few cents in their account. This can be attributed to them being under capitalized and not sticking to the trading rules in the right manner.
Trading Using A Small Account Balance
Trading forex with a meager amount of capital calls for a lot of hard work on your part. First of all, you must be ready to give yourself a few years’ time if you want to earn some decent profits. You must also be prepared to put in some hard work consistently by paying close attention to the risk management principles. Traders that take the easy route become over leveraged as they take more risk. Eventually, they suffer losses and lose all their initial capital. It is, therefore, very important that you understand as to how leverage actually works. A small mistake or even a slip of your hand can easily wipe out all of the profits that you have earned till then.
Discipline has a key role to play in currency trading. Defining and sticking to your own trading rules and following risk management rules often go a long way in making you successful. People who trade with small amounts of money in their accounts may feel pressured to earn profits quickly. This can lead you committing avoidable mistakes.
Trading Using Leverage
If your trading account is small, then you must use leverage with a lot of caution. The thumb rule is that you should not use more than 1:10 leverage if you are trading with a capital of say $500. Theoretically, you can go up to 1:200. This means that you are risking $500, but you have control up to $100,000. You might find this very tempting, but the risks can also be equally big.
One of the best ways in which you can use leverage is by focusing on just a couple of currency pairs. If you have too many positions open, your leverage gets distributed. This, in turn, compromises the profits from potentially successful trades. Therefore, focusing on a few forex pairs will enable you to have enough capital to cover the losses.
The biggest challenge faced by undercapitalized traders is longevity. It is dependent on the ability of your trading strategy to provide encouraging outcomes. Consistency often comes with familiarity and mastery over risk control practices. When it comes to forex trading, you should be aware that all aspects are linked to each other. Missing out on just one aspect can result in you incurring losses. If you are under capitalized, accruing losses will deplete your account pretty quickly.
If you want to trade conservatively, you should focus only on a particular instrument. Most traders often tend to focus on gold and silver. In the case of these metals, the values and tick size are higher. While it may fetch a higher return if you win, it can impact your profits and diminish your trading capital rather quickly if you lose. As such, the key aspects to focus on are choosing a forex pair you like and doing your homework well. If you focus on the fundamental aspects that drive the price of currency pairs such as the liquidity and trading volume, among others, you will be able to take a better decision.
Summarizing, it is quite evident that you will experience stress if your trading account is undercapitalized. The pressure to earn profits and grow your account efficiently and consistently will weigh on you. In order to trade successfully, you must focus all important aspects related to forex trading such as risk control and trading strategy. Moreover, you must remain patient and exercise discipline if your goal is to earn profits. The financial markets are notorious for giving you profits and taking them back quickly.