If you are just starting out in the forex market, you might be thinking ‘do I really need to go all in?
The answer to that question is no, you don’t. In fact you are advised to not invest all your savings into one market before getting any experience.
So then if you are not putting all in, how much is safe to invest? And more importantly, for those who might not have a great amount of savings in the first place, the question of the hours might be ‘how little can I invest to still be able to make profits?’
These are all valid questions so we will go over them one by one.
Margin Trading
We cannot discuss lot sizes and position sizing without discussing margin trading first.
Margin trading allows a trader to borrow a portion of the amount they are trading. This means that a trader does not have to have the entire amount in their trading account. For example, they might just have 1/50th of the required amount and borrow the other 49 parts from their broker. This will be called leveraging 50:1 and this is what margin trading allows you to do.
Different brokers offer different leverage. You can go as high as 200:1 too or as low as 20:1. This part really only depends on your broker’s policy.
Why are we talking about margin trading? It’s because it allows you to start even smaller with the offer to leverage the rest.
How much can you trade with?
You can even open an account with $100.
Let’s take a look at how that will play out though.
If you start an account with $100you can buy a micro lot. A micro lot means 1000 units of a currency. If your leverage ratio is 100:1, you can buy 1000 units of USD with 10 USD. So that is how much you are investing. However, you also want to keep in mind the risk. It is highly recommended that you don’t risk more than 1% of your account per trade. This means that you should place your stop loss where the pip value comes to $1. $1 is all you can risk.
You can imagine, in this scenario, how your options will be limited.
It is not just how much you can open an account with that matters. It also matters how much you can risk and then consequently what your reward will be.
Risk and reward go hand in hand. So if you are risking $1, you might make $3 to $4 off of a trade, should you make a profit. This is not a sustainable profit level as it can demoralize you and make you feel like you are wasting your time with the market.
Therefore, you want a profit margin of at least $100 per trade. This will require you to start with a capital somewhere between $1,000 to $5,000.
At the end of the day forex trading is about making profits. If you are just getting by and making sure that you are not losing money, then what is the point of spending time and energy exchanging currency anyway? The motive behind every business is to make a decent income.
Therefore, technically you can start with an account as small as $100. However, you might not want to do that because it will not bring about a lot of profit and there will be no motivation behind trading.
However, one aspect of trading that can justify starting as small as $100 is learning.
Difference between trading real currency and demo currency
The main difference here is that when real money isn’t on the line, you are not emotionally invested in the trade.
In forex, it is often emotions that will make or break a trade. A demo account does not offer that thrill as you don’t fear losing your money nor do are you motivated to make more money.
Starting small is a good alternative then to demo trading. You can start as small as $100, or $200 with the intention of using that capital for learning purposes only. As you begin to gain confidence then and develop your strategy, you can expand your account to a couple of thousand dollars.
We hope this information proved to be useful. You can find more such information in other blogs we’ve done.
