How much should I start with to trade Forex?
Many traders who are starting out in Forex are wondering what would be an appropriate amount of money to start trading in the world’s largest financial market.
Maybe they’ve just found out about the opportunities that Forex trading offers or perhaps they’ve demo traded for a while and now feel they have a profitable strategy that they want to implement on a live account.
The answer to the question “How much should I start with in Forex trading?” depends on several factors that we will explore in this article. But, first of all, one word of advice: Don’t be misled by the minimum deposits that you see on many brokers’ websites as part of their requirements to start trading.
Most often, these "minimum deposit" sums are thrown out there as a way to attract different groups of clients and that’s why they have different types of accounts with different minimum deposits. This is especially true of the “market maker” types of brokers where literally there is no difference between the account types (since all trades/orders remain within the house and the broker controls all the rules). The only purpose of the different account types is to make them look more professional and appealing to clients with deeper pockets.
The fancy looks on their website may even lead you to believe that somehow the pro account with a 10k minimum deposit is better and/or easier to be profitable on than the standard account with a $1k minimum deposit. The fact is if you aren’t making money on the $500 or the $1k account you won’t be profitable on the $10k or $50k either. There is no reason to put in 10,000 dollars in trading if you are not profitable on a 1,000 dollars account.
In such a situation, it means that you need to keep working on your trading and keep improving in order to get to a point where you are consistently profitable before investing more money.
Now that we are clear that the minimum deposit shown on the broker’s website shouldn’t be used as a guide for your actual deposit, let’s get into some numbers that can help you decide.
While it would be easy for us to just say a 100 dollars or a 1000 dollars is the amount you should start in Forex trading, the answer is not that simple and it depends more on you. Particularly, as you know Forex trading is very risky and it’s highly recommended to only invest money that you will not need for other things in life.
With that said, for a first live trading experience, it’s absolutely recommended to go with a smaller account, say about 5 - 10% of the total sum you plan to invest for your main account in the future. So, if you plan to invest $50k later down the road, then you can start with something like 2 – 5 thousand dollars. This account will serve you to experience live trading for the first time (which is psychologically very different from demo-trading) and to learn to deal with your emotions.
Now, for those of you that plan to invest only a few thousand dollars in the future I must say that an absolute minimum to trade currencies would be several hundred dollars. To make matters simple let’s say around 500 dollars or even better 1000 dollars. This is contradictory with the minimum requirements from most Forex brokers which are something like 100 or 200 dollars the most.
But, this is why we earlier said that these numbers should not be your guide. The reason why five hundred or a thousand dollars is a more appropriate absolute minimum deposit for Forex trading is risk management. Specifically, the normal daily volatility (price fluctuations) in the Fx market is around 1%. Given that the minimum position you can take on any trade is 0.01 lot (equals to $1000), your risks to any trade you take will be automatically larger than 1 or 2 percent if you deposit less than 500 or 1000 USD. In other words, with an undercapitalized account, it will be much more likely for you to get a margin call just by normal daily moves even if you have a great and profitable trading strategy.
So, in the end, this is why it’s crucial to understand lot sizes and risk management before investing anything in Forex trading. Even if it’s a few hundred dollars just to experience live trading, there is no reason to blow that account up because of not understanding the risks.
So, by all means, test everything on a demo account, try with the amount you plan to deposit and see how well you can manage the daily risks in the Forex market. One thing is certain in trading – the more money you put the more you can lower your risk (that is by lowering the size of the lots also).