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Capital Requirement for Forex Trading
One of the most frequently asked questions by forex trading beginners is how much they need to open an account or enter a trade. A too-small investment will take a longer time to produce profits, while considerable amounts often accompany high risks of losses. So to trade successfully, traders should consider a good amount based on various factors to start trading forex.
Do You Need Money to Trade Forex?
To make money by investing, you always need initial capital. This same applies to forex trading as well. Inevitably, before participating in the real forex market, speculative traders have to estimate how much they need in a real account. Many people can either use some portions of their savings or borrow from close relatives to start their trading.
However, the forex market has a competitive advantage over other financial markets (e.g. equities or stocks); that is, trading forex does not require a big deposit as traders may use different leverage ratios provided by brokers to increase their buying power (capital amount).
How Much Does It Cost to Start a Forex Account?
The answer depends on the broker you work with. Please bear in mind that most brokers cost you no fee to enrol for an account on their browsers. After registration, you are allowed to open as many accounts as you want and freely transfer money from one account to another.
Besides, before starting a real forex account, you may choose a demo account to either practise what you theoretically learn about forex and see how the market operates or test your trading strategies. The demo account gives you no monetary risks; instead, brokers will provide a virtual capital that is available deposited to your account. Glancing at the picture below, you will realise that any participants in paper trading on the customised platform of FiNMAXFX all receive the capital from $3,000 to $100,000.
Coming back to our main question, “How much is enough to start a real forex account?”, you can see the required deposit of different brokers rather varies. Some accounts can be opened with a minimum deposit of $100 or even $500, whilst the majority of brokers require an initial deposit of at least $250. Such funds can be sent to your real accounts by credit (or debit cards), bank wire transfer or e-wallets. Having said that, you are still advised for a higher deposit as it allows more flexibility and better risk management when you trade forex.
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Generally, brokers give you no additional charges when you put money in an account. However, because you choose to deposit funds in mostly USD, EUR or GBP, transferring via banks or credit/ debit cards can charge you some fees of transaction and exchange rates when you swap your host currency with the US dollar, pound or euro.
How Much Money do I Need to Trade Forex?
This is an important issue that you should consider seriously before you get involved in the real trade. When you can deposit at least $100 does not mean you should start trading with that amount.
Basically, there is no legal minimum capital requirement to start trading forex; this is also one of the distinct benefits that trading forex offers investors. Theoretically, you can even trade with $1. Nevertheless, if you want to earn a considerable sum in a short time, investing such a small amount hardly enables you to achieve that target. There is always a big difference between investing $1, $100 and $1000. When working with financial experts, you are often advised to start with significant amounts to earn bigger profits easier.
However, the question is, how much do you need in your account to trade sensibly and effectively? The answer relies on various factors such as position size, leverage ratio, risk management methods or trading style.
when trading forex, investors can leverage their position – in other words, use a “borrowed” capital to produce higher returns. Particularly, if a trader has $200 in his trading accounts and the broker allows the 1:30 leverage ratio, he can start trade with the maximum $6,000.
In case you want to buy a standard lot of the GBP/USD currency pair – in other words, 100,000 Pounds (GBP) – at an exchange rate of 1.29719. So you need $129,719 to buy £100,000. Assuming that a broker allows you to use leverage (which ratio is 1:200), you do not need to have $129,719 for a purchase. Instead, you need at least $129,719/200 = $648.595 to start trading. This amount is the minimum margin required by the broker to keep your position open when your buying power is increased up to 200 times. Depositing a lower amount than the required margin is unadvisable.
When learning about forex, risk management is always the top priority you should focus on. As the forex market can bring you a lot of money, risks are something unavoidable when you trade forex. Normally, you are advised against risking no more than 1% of the capital per trade. This limits the acceptable loss on your trade.
For instance, if your real account has $500, the maximum risk on a single trade should be only $5. Imagine you only have $100 to trade forex, so you should not risk over $1. In any financial markets, the more risks you face, the more rewards you may have. Therefore, trading with inconsiderable capital to avoid risks is not a wise decision. Instead, many speculative traders often invest more generous sums and use risk management techniques such as stop-loss orders to prepare for the worst cases when they confront a string of losing trades in a row.
Yet how much is realistic? Many investors may use stop-loss to calculate their risk level. Taking the given example of the GBP/USD currency pair with the same trade setup. Accordingly, you decide to buy 100,000 Pounds (GBP) with a current price of 1.29719 and your broker requires 0.5% margin (equivalent to the 1:200 leverage ratio). The pip value in one standard lot will be calculated as follows:
- The pip value of the pound (GBP) = (.0001 / 1.29719) x 100,000 = £7.71;
- The pip value of the US dollar = 7.71 x 1.29719 = $10.
The required margin to place an order = Units Traded x Account Currency Exchange Rate x %Margin = $648.595.
Assume that your initial investment is $10,000, you should not risk more than $100 per trade, which means for a lot traded, the slop-loss level should be 10 pips away from the entry price. In another scenario, when you open a 20,000-unit position (equivalent to 2 mini lots or 0.2 lots), one pip equals $1 and the acceptable loss now is only $20.
Generally, the total trading capital you need should be big enough so you can distribute it into many small packages that you afford to lose.
In addition to risks, another good way to look at the feasible trading capital is considering potential rewards by calculating the risk-to-reward ratio, win rate or expected rate of return (ROR).
Frequently, traders try to maintain a risk-to-reward ratio of at least 1:1, but the 1:2 rate is highly recommended. It means they are willing to risk $1 per trade to possibly gain $2. So, how many trades should you win to achieve a 1:2 ratio? According to the formula, Minimum Win Rate = 1 / (1 + Risk Ratio), you need to win 33.33% of total trades (= 1 / (1 + 2)).
In case your monthly win rate is 40%, your trade setup can have a risk-to-reward ratio of 1:1.5.
Further, the rate of return refers to positive or negative gains from investment in a certain period of time. The average figure often varies from 2% to 5%. Accordingly, if your desired profit is $400 on a trade which is equivalent to the ROR of 5%, the potential trading capital is $8,000.
Depending on your trading goals and the time you would like to get returns, you will develop a suitable trading style as day trading, swing trading or position trading strategies.
Forex day traders and scalpers often open and close a few trades within a single day. Opening a too small position will accompany very low risks of losing money yet also means inconsiderable profits.
Swing trading is suitable for those who dislike glueing their eyes on charts constantly and only trade in free time. Those traders often hold their positions for some days or weeks, so they have wider stops, from 20 to 100 pips, depending on trading strategies and currency pairs.
Position trading relates to staying in trades for a longer time, so position investors often place stop-loss levels at 100 to 150 pips or even much more. The longer they hold positions, the more concerned they are when facing price fluctuations and other relevant risks. Therefore, longer-term traders often open a much larger position with a lower leverage ratio to deal with daily fluctuation.
Imagine you plan to swing trade EUR/USD in a micro lot. The pip value equals $0.1 accordingly. If you use a stop of 70 pips, you expect the maximum risk of 1% – equivalent to $7. Accordingly, your trading capital required is at least $700 to open an account. However, $700 is unnecessarily a required margin to start a trade; instead, only $100 with the 1:100 leverage rate is enough to place an order. When you set up the trade with the risk-to-reward ratio of 1:2 and plan to get out of the market twice a week, you will be able to make about $24.
In another scenario, if you trade with $5,000, the risk can be $50 on a single trade. However, you could potentially receive a higher earning of $100. This proves that the higher initial trading capital can give you a greater risk but build your account more quickly.
Having said that, more isn’t always better. For forex trading beginners, starting small will be a tremendous option to get familiar with the real forex market, after that reduce pressures of using large investments or high leverage ratio and facing unexpected risks.
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