Starting to trade in forex and in general trading in any other financial market, is today easier than ever. And it is that access to brokers where to trade with all kinds of financial instruments requires little more than an internet connection. But often new traders forget that the available trading capital will affect their trading capacity. You often want to start with a small account and live from trading in a matter of a few months.
From a strict point of view, to operate in forex you need a computer, internet connection and amounts as low as 1 USD. Yes, you read that right, there are brokers that allow you to open trading accounts with just one dollar. But what can you do with a one dollar account?
The minimum recommended amount
In a very general way and without taking into account many factors, some amounts where the vast majority could fit would be 25 thousand dollars to trade in the stock market, for futures between one thousand and five thousand and to start in forex it would be enough with $500.
For me the numbers given in the previous paragraph do not make sense if they are not accompanied by more information and some calculations. Before continuing, always be very clear about these premises:
- Invest only the money you do not need for anything else, that money that if you lose it does not mean a sharp change in your lifestyle.
- If you have just started, do not start risking all your capital, so you can recover if you lose a lot in your trading account and start over.
- Only start trading with real money after you have trained and practiced at least few months.
To calculate the money you will need to start trading, you must first meet the minimum to open an account in the best forex broker you have chosen, that is, meet your initial margin requirement. To this amount you will have to add the amount that contribute factors such as your profit objectives, your trading style and trading conditions of the broker, commissions, margin required before a margin call, etc.
What I propose is to make a business plan, trade in forex is that after all, isn’t it? You have to have a plan in which your goals are set, how are you going to accomplish your goals and what are you going to do in case of possible setbacks (which will surely arise). Having a plan does not guarantee success at all but it is much better to have it than not to have it, this point should be very clear.
It is assumed that, before switching to real money trading, you have been training and practicing for at least one year with your trading system, so you must have data on it, such as maximum expected drawdown. Suppose the maximum drawdown you expect is 30%. Would a $ 500 account be enough if my broker only allows me to trade with at least 1 lot? If we review the lesson about the pip and the lot we will see that a standard lot is 100 thousand dollars.
When trading with 1 lot in pairs such as EUR/USD, the profit is $ 10 for each profit pip, and the loss is $ 10 for each lost pip. Thus, without counting the commission pips that the broker takes, with a movement against only 30 pips, $ 300 would have been lost, which has doubled the maximum drawdown (30% of 500 is 150), it would have lost more than half of the money in the account and would be at the limit of a margin call. Obviously for this case 500 USD would not be the amount of money needed to start as it would be too risky for the trading conditions of the broker and the trading style of the trader.
Assume now the same previous conditions but with a minimum volume per operation of 0.1 lots. To reach the same dire point, 300 pips of loss would now be necessary. And with 150 pips of loss we would have reached the maximum drawdown of our trading system. This situation is already much more benevolent. And 500 dollars can be worth as a starting capital or maybe not, it depends on the objectives and other characteristics of the trader’s trading style. If I put my specific case, they would not be enough at all since 150 pips is my stop loss in each order so losing a single operation would be at my maximum drawdown and losing too much money with respect to the total of the account, and with 2 or 3 three consecutive losing operations would be out.
Now suppose that for a trader in question 500 dollars are, as we saw before, a sufficient amount of money to start. And so as not to get too caught up, he decides that instead of 500 USD he will open his account with 1000 USD and will operate with 0.1 lot. In this situation you will be more relaxed about the drawdown, the margin call and this whole topic. But now he stops to think about his goals. It turns out that trading on paper during your training comes to forecast average earnings of 6% per month. But he wants to earn at least $ 1,000 a year. 6% of 1000 are 60, which multiplied by 12 would be 720 dollars. With these initial 1000 dollar numbers they would fall short to meet their objectives, adapt to the trading system and the conditions of the broker. To accomplish all this you would need at least $ 1,500 initial.
Also Read: How to Start Forex Trading with $100
I hope it was clear what i was trying to expose. You may need as much money to start trading as the joint needs of your trading style, your goals, the broker’s conditions and your own resources require. With these factors in mind, you can now look closely at the minimum amount to start forex trading. Hopefully these tips have been useful and help you to take appropriate considerations.