03. How Much Money Do You Need to Start Trading Forex?
How much money do you need to start trading forex?– We are sure this question has come across your mind as well. Well, to be honest, anyone with a small amount of cash in their pocket can dabble in this global marketplace.
And there’s no doubt that forex can be exciting when you know that it’s a $4 trillion per day market. We read everywhere how people are making millions in forex. The first rule of trading Forex is money management and figuring out how much you need to invest.
Can you get rich by trading forex?
Forex trading can make you rich if you are a next-to-perfect skilled forex trader. But, Forex trading is not a Get-Rich-Quick Scheme. However, you did see a lot of forex gurus leading a luxurious lifestyle by trading forex. The reality is much less glamorous. So. can you get rich by trading forex?– yes.
Consistent success in the forex market demands hard work, dedication, and continuous learning. Think of it as climbing a mountain, not riding an elevator – slow and steady progress, not impulsive leaps, lead to your ultimate trading goal.
What seems so easy is extremely difficult. What seems to give you endless pips and profits will quickly diminish your account in staggering losses. To this end, we have to avoid the twin dangers of over-capitalization and under-capitalization.
Over-capitalization: Never Bet The Farm
Wanting to have a luxurious life has tempted many people into rushing into forex with money they cannot afford to lose. Some people quit their jobs to become “forex traders” with their $6000 savings account, hoping to live off the 30% monthly return they were expecting from their trading. Needless to say, in striving for an impossible return, they over-leverage and over-trade their account into oblivion within a couple of months.
If you are new to trading forex, and you do have money, you should avoid the temptation of over-capitalizing your account.
Undercapitalization:
Undercapitalization occurs when you need more funds to trade safely. It’s like going into battle without armor. You might lose everything.
Many retail brokers offer minimum account deposits as low as $1 or $25, but it would be foolish to trade with the minimum. One losing trade would cause a margin call and force you to liquidate all positions at a loss. A typical forex trader might start with $100-200 in a micro account, but even that size is under-capitalized. So What’s The Amount?
It’s safe to start with $300 at least and trade on 0.01 lot per trade. This will help you gradually increase your account balance. While $100 can get you started with a demo account, undercapitalization can lead to overleveraging (borrowing too much), risking a complete loss of funds, and blowing up your account.
Most new traders lose money, so beginning with a modest capital amount is advisable to effectively manage risks. We suggest following these guidelines below-
Money Management:
You should always risk 2% of your capital per trade. For example, if you have a $500 account, you will be risking 2% of this amount, that is $10. Never over-trade on a single currency or trade. At SureShotFX, we always suggest to trade only 2-3 pairs per day. That helps you balance your risk management as well.
Risk Management:
Risk and reward are two terms where the risk refers to the Stop Loss(SL) and the reward refers to the Take-Profit(TP). Using your allowable money management, for every 1 pip in your stop-loss you must ensure that you gain 3 pips of profit. We term it as a 1:3 Risk to Reward ratio. So, for a 0.01 lot, for every $2 used in the stop loss, you should be prepared to target $6 as your profit.
When you are trading in micro lots, you will need to provide extra attention while choosing your trades. Only join trades with a high probability of success, and target your setups with well-defined support and resistance criteria. Some chart patterns, like the flag and pennant, have defined profit targets, and the pattern boundaries can also help in defining the stop loss.
If you want to make hundreds or thousands from forex trading, you must invest your dedication, and time and increase your knowledge. We hope that you got an extensive idea of how much do you need to start trading forex.
This is what you learned today-
- Money management is the first rule to trading forex
- Overcapitalization in forex should be avoided
- Undercapitalization can lead to account loss
- Always risk 2% of your capital
- Trading forex with 1:3 risk to reward ratio
