If you’ve been reading all the news about Forex lately, you might be wondering how much money you need to start trading in the Forex market. The quickest—but probably least helpful—answer to this question is probably a hypothetical fixed amount, such as $500, for example.
Many brokers set a minimum amount for opening a Forex trading account. However, if you want a more practical answer, you’re going to have to think things through for yourself. In this post, we try to help you do that.
How Much Money You Need Depends on Several Considerations
How much money you’ll need to start trading Forex depends on several factors. For example, what are your goals with regard to Forex trading? You’ll also need to take into account your personal circumstances, your trading style, your planned strategy, and other particulars.
Take into Account How You’ll Manage Risk
For example, many beginning traders tend to gloss over their strategy for risk management. However, this is generally the key consideration that separates successful Forex traders from the others. What’s more, how much money you have in your account plays a considerable role both in mitigating risk as well as shaping your risk management strategy.
There are other articles that explain in greater detail about how to optimize your risk management. However, you shouldn’t risk more than 3% of your account on each trade you take. Use this rule of thumb and you’ll naturally limit the size of your trades, because they will be based on how much money you have in your Forex trading account.
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If you are serious about getting into Forex trading, you’re probably not doing so just as an academic exercise. You’re more likely taking this step because you want to earn some profits.
What you must understand, however, is that the more money you have in your trading account, the more profits you are likely to make. After all, as the wise financiers of the past have told us, you need money to make money.
But here’s the downside you must keep in mind, and this is absolutely critical: The more money you keep in your Forex account, the more funds you’ll have at risk. And you never, ever want to have money in your Forex trading account you cannot afford to lose!
How Much Money You Invest Will Affect Your Potential Profits
To illustrate that how much money you have in your Forex account determines how much money you can make, here’s an example.
Let’s just say you have $1,000 in your Forex trading account. As a beginner, you want to start out conservatively. Therefore, you take fewer risks, making the least risky trades and keeping in mind how much money you have available.
If your Forex trading strategy has a 1.5:1.0 profitability ratio (that is, the amount of gains divided by the amount of losses), which is about average for the industry, then you could expect to average $5 per trade.
If you were to average five trades a day, you could expect to make about $25 each day that you engaged in trading. How does this compare with the amount of money you had in mind when you started thinking about Forex trading?
Also, remember that you would need to win every single one of the of the trades you take.
Consider Your Trading Style
Additionally, your trading style matters, too. For example, if you have tried swing trading, then you know that requires a much broader stop loss. This is because you have to withstand wider moves in the market since your position is open longer.
What this means is that you’d have to take a micro-lot to keep from risking more than $10 with a 100-pip swing. If this form of trading is more your style, you could end up averaging around $100 per week. Still, that would depend on how many trades you could get in.
We need to point out here that these are hypothetical examples. They’re based on average ratios of successful traders with several years’ experience, and you shouldn’t use these as a benchmark or even a goal when you first start trading Forex. They are strictly for reference. We discuss them here so as to help you evaluate how much money you want to start off with in your Forex trading account.
Wouldn’t It Be Better to Go Big?
You might think at this point that you would do best by placing as much money as you can in your initial Forex account.
However, maybe “going big” is not such a great motto for a beginner. Trading Forex on a live account is far different from trading on a demo account. Your initial performance is virtually guaranteed to be somewhat disappointing to you. All the same, you’re bound to improve as trader if you stick with it for a while.
In the beginning, try to be focused on generating modest gains that you keep in your trading account. In other words, leave your trading account untouched and don’t make any withdrawals for a good while.
This is because you want to try to allow your account to grow. Remember that, while having a minimum account might be less risky, you won’t make big profits that way. Moreover, the relatively small profits you’ll make might not be enough of an incentive so that you choose to stick with trading long enough to get better at it.
Take Your Time Deciding How Much Money You Can Invest
In order to cope with this basic Forex trading conundrum, many beginning Forex traders decide to allocate a certain amount of their income to trading over a period of time. This allows them to manage their risk and grow their Forex portfolios while they continue to learn about trading.
Sometimes they might make withdrawals to enjoy their profits, but they also understand that means they have less money available for profiting from their Forex trades.
Forex trading is an art that takes time to learn and develop. So think of your Forex trading account as an opportunity for you to save. Alternatively, think of it as building your trading account until it’s of a size that suits your trading style as well as how much money you want to make in the long run.