Forex trading may seem like the most profitable means of gaining long and short-term profits. But without adequate knowledge, it might not be easy to drop down, enter, and exit the Forex market with huge profits. Forex trading occurs 24 hours a day and five times a week (excluding weekends).
Most of the time, Forex trading appears profitable because of the leverage that many Forex brokers offer to potential and existing traders. However, the marketplace’s volatility can lead to substantial losses for traders.
Well, with the knowledge, fundamentals, and a guide to Forex’s top trading styles, what do you need next? If your answer is trading capital, then great! But how do you figure out how much trading capital does a Forex trader need?
How Much Capital Do You Require for Forex Trading?
There are various capital amounts that can influence your Forex trading strategies and style. Below are some of the factors and examples that can help you determine the capital you require for Forex trading.
Importance of Leverage
Leverage is a great determining factor of how much capital you should have to begin Forex trading. Although leverage appears favorable to a large number of traders with the sense of potential profits and trade access, there are risks that can make trading a nightmare for traders, especially beginners.
Therefore, it is necessary to determine the leverage that you want to go for with a specific amount of capital according to your trading strategy and profit aims. According to certain sources, the best practices for Forex trading involve not risking over 1 percent of your own money on trade positions.
Imagine gaining profits when you get leverage up to 10 or 400 times. But have you imagined the losses that you would have borne if the case was entirely different?
When going for a small capital investment such as $100 in your brokerage account, you can avail of up to $10,000 worth of trade positions if the leverage ratio is 100 to 1. Consequently, even small profits will make up hefty percentages of the initial investment of $100.
However, in order to effectively manage risks, consider using management and not going overboard with any trade. Instead, create a risk pattern of no more than $1 on each trade (i.e., 1 percent rule) on a $100 account.
What mostly happens is that beginner traders decide to go with low trading capital and assume that with the leverage ratios, they can easily double or even triple the initial investment. However, this might not be the case, and it is highly likely that they bear losses if their strategy is not successful.
Consider the Trading Risks and Undercapitalization
In addition to considering leverage ratios, brokerage fees, and commissions, incorporate risk management and “bounce-back” strategies for undercapitalization. It is possible that trade may not turn in your favor and expectations, or worse, it might become adverse for your entire trading plan. In this case, you could lose a whole lot of money, and that calls for the 1 percent rule.
What’s more, in determining the capital needed to begin Forex trading along with leverage ratios, brokerage fees, etc., you should consider your savings and the minimum deposit amounts that many brokerage firms or individuals deem optimal. While some may offer as low as $10 to open a trading account, there are other firms that will recommend beginning with $1,000 to $5,000.
Also, keep in mind that low capital means that your short-term incomes will also be low. In comparison, even high to moderate capital amounts, such as $1,000 to $5,000, could yield proportional incomes and generate higher profits than it would do with small capitals like $100 or $500.
Always consider the risk of getting undercapitalized and experiencing losses that might not even be predictable any time soon. Brokers may offer investment opportunities to make huge gains with considerably small capital amounts like $50 or $100.
But, keep in mind the undercapitalization and the leverage ratios that can turn against you. Considering stop losses and optimal strategies to put the effects of successful trading in action is the best way to go on Forex.
It is encouraging to dream about turning those minimal investments into large profits. Despite this, do not ignore the precautionary guidelines and risk management when entering Forex trading. And remember, moderate capitals that suit your capital gains and trading strategies are better than high-risk small investments that can turn the leverage against you in a matter of a few ticks.