So, you did your fair share of demo trading, learnt everything you think you should’ve learnt about Forex trading and now you are asking how much money should you start trading with? Well, this can be a tricky question, especially now that so many brokers allow traders to open an account with very little money. The obvious answer is that the more money you put the better because it automatically means you can make more money. But, it’s not necessarily the case, not until you have enough experience and a proven strategy. What if you lose it all? – Certainly a possibility in trading financial markets.Read More
So, what you need to ask yourself first, is what are your goals with trading? Do you intend to make a living or do you just want to take your learning to the next level by trading live? Depending on your answer the trading capital you will need can differ substantially.
First, let me tell you right away that if you are thinking that you can deposit a $100 or $200 and retire in a few months you’ve got things completely wrong and your expectations are far beyond reality.
Now let’s talk about a more realistic case.
Let’s say that you want to quit your job and make a living by just trading the Forex market. To do this it means that you will need to withdraw a part of your account balance regularly, something like every month or every week. The money you will need to cover your monthly living expenses will vary depending on where you live, but let’s say, for the sake of simplicity that you want to withdraw a $1000 from your account every month.
To do this you need to make a profit of at least $1000 every month. If you also want to grow your account over time you will need to make more than $1000 per month, and if you happen to make less your account balance will be shrinking.
Now the big question. How much starting capital do you need to make $1000 in one month?
This will depend on your strategy, but let’s say if you make 100 pips per month on average, that means you need to make $10 for every pip to reach your $1000 monthly target. And every pip is worth $10 when you trade with full sized lots of $100 000. Naturally, you also will be losing $10 on every negative pip.
If you want to have the usually recommended 2% maximum risk on every trade, and your stop loss won’t be higher than 40 pips then this can be calculated as $400 risk on every trade, and $400 is 2% of $20 000 which would be the minimum required deposit amount for this strategy. Remember your account balance will stay flat and won’t be growing in a scenario like this since you are taking out everything you make.
The other case, when you just want to taste the live trading environment and test your skills for real, then depositing a smaller amount of a few hundred dollars will be OK. Here, as always you need to keep track of lot sizes, the higher your account balance the bigger lot sizes you can use.
In this regard, I would also like to say that even for testing purposes, a bare minimum of $500 is recommended, simply because with less than that, say $100, you will have a hard time maintaining more than 1 open trade at a time. Because the smallest possible trading lot for most brokers is the micro lot ($1000) even to just test things you will need at least $400-$500 to allow you to capture all opportunities in the market and test your strategies for real.
And if your strategies are profitable, you can even make a small profit.
Lastly, always remember to never invest any money that you might in any way need for other more important things. Only invest money that you can completely afford to lose. It’s not uncommon for new traders to blow up their accounts and that’s why you need to be careful, especially if you are a beginner. Start with a smaller account first and then add up as you gain more confidence.
Also, this recommendation doesn’t just have to do with the risk of losing all the funds in your account, but also with the psychological pressure you will put on yourself if you can not afford to lose the invested funds. Trading under such pressure can cause you to make trading mistakes that will further undermine your success and your attempts to succeed in the Forex market.