How Much Money Do I Need to Trade Forex ?

How Much Money Do I Need to Trade Forex ?

Before going to into how much money you’ll need to trade forex effectively, we need to look at why this issue is even important. Does it really matter if you start an account with $100 or $3000? Yes!

One of the most significant issues new traders face is being under-capitalized. Forex brokers are guilty of fostering such an environment by offering to open accounts for at little as $5 in some cases…although the minimum opening balance is usually about $100. 

Let’s face it, if you want to start trading, it’s likely because you want an income stream. Well, you aren’t going to have much of an income stream if you start with $100. Since very few people are patient enough to let their account grow, they will risk way too much of their capital on each trade trying to make an income, and in the process lose everything.

I am a firm believer in never risking more than 1% of capital (max 2%) on a single trade. If your account is $100, that means you can only risk $1 per trade. In the forex market that means you can take a one micro lot position (see Calculating Pip Value for information on various lot sizes), where each pip movement is worth about 10 cents, and you need to keep the risk to less than 10 pips. Trading in this way, if you have a good strategy, you’ll average a couple dollars profit a day. While this will build your account slowly, most traders don’t want to make a couple dollars a day, they want to build their account much faster and therefore will risk $10 or $20 per trade–sometimes more–in an attempt to turn that $100 into thousands as quickly as possible. This may work for a time, but usually results in an account balance of $0.

The other problem with forex trading with such a small amount of money is that it offers almost no flexibility in the style of trading you undertake. If you deposit $100, and follow proper risk management protocols, you can only risk 10 pips if you take a 1 micro lot position. You have to be an active day trader. With a 10 pip stop loss it’s unlikely you’ll be able to swing trade or invest, since the price can easily move 10 pips against you, resulting in a losing trade, if you try to hold out for long-term gains.

New traders are better off saving up more money before opening a forex account, thus adequately funding their account so they can trade properly.