How much capital do I need to start trading forex
Forex trading is now easily accessible and with just very few easy steps you can open a live account and start trading. When it comes to deposits some forex brokers will allow you to deposit a minimum of $50 but not to forget the minimum deposit requirement will also depend on the leverage and lot size a trader is exposed to.
The trading capital you need will depend on your financial capabilities and the trading strategy used. This means if you are a conservative trader who is not risking too much in their trading account by risking only 1% or maximum 5% of their trading capital are usually fine with a small deposit since their account is not exposed to a very large risk and therefore their margin level remains sufficient for the most part. As for aggressive traders who allocate more than 10% risk will require a bigger deposit. It is natural since their account risk exposure is larger than the conservative trader.
Consider an intra-day trader and a swing trader. Both traders enter the market and the difference between them is the timeframe and the duration of the order. In other words, one is a day trader and will make sure to close all open orders before end of day as for the swing trader will usually keep orders open for more than 24 hrs. knowing there are small or large market swings that can expose him to a high level of risk. The capital invested by an aggressive trader should be far bigger than the conservative trader.
Let us look at different scenarios:
1) A trader deposits $100 in his account will need to keep the risk extremely limited by not exceeding more than 1% risk on each trade, use micro lots and must not open multiple orders at once. Even if the trader is experienced will still need to be careful since forex trading is exposed to high volatility and uncontrollable sudden movements that can affect any open order.
With one wrong decision you can easily lose more than 50% of your capital in a matter of minutes and worst case scenario your broker will initiate a margin call asking you to deposit more funds due to insufficient margin especially if no risk management was applied.
2) A trader deposits $500 can risk up to 5% and open multiple orders. The trader will still need to keep the risk to a minimum and take precaution even with a conservative trading strategy. You would still need to trade micro lots since the deposit amount is still considerably low.
A $500 account will of course provide you more flexibility trading wise as well as more income than a $100 account, but the profitability remains very small and limited.
3) A trader with a $5000 account will feel like a game changer. The level of risk the trader can afford is higher compared to a $100 or a $500 account and you the trader at this stage can move on from the micro lots and start taking mini lots instead such as 0.50. Your account profitability increases, and you will be granted much more flexibility.
With a $5000 account you will be able to achieve larger profits of $50 to $100 daily.
Let us calculate: The forex market is open 5 days a week, and if you make $100 daily, that is now $500 in a week. In a month time you would have made $2000 profit additional to your capital. It is worth it!
Of course, as easy as it sounds this cannot be achieved without discipline, a proven and successful trading system and obviously a solid risk strategy.
In conclusion, a $100 account is small no doubt, will not produce a satisfying income monthly and is prone to higher risk of receiving a margin call if something goes wrong and may also result in wasting your time. A $500 account will provide you more flexibility, but it still isn’t enough to achieve a reasonable income but a $5000 account or higher can do that.