To trade on a financial market, you need capital. Capital is used to buy an instrument if your analysis shows that its price could increase in value, eventually leading to capital gains and a profit for the trader. The Forex market is no different – in order to start trading currencies, you need to invest a certain sum of money with your broker which is then used to buy and sell currencies. The amount invested has a direct impact on the amount of profits you can make, as larger trading accounts can open larger position sizes than smaller trading accounts (given the same amount of leverage).
We will tackle the important question concerning the minimum amount of money needed to trade Forex in the following lines, and show you that there is no universal answer that applies to all traders.
Anyone can trade Forex
During the Bretton Woods agreement, which lasted from 1945 to 1973, major currencies were pegged to the value of the US dollar, which in turn was linked to the price of gold. Exchange rate fluctuations were very small and investors couldn’t make a profit from trading currencies. It was not until the end of the Bretton Woods agreement that currencies started to freely fluctuate under the forces of supply and demand.
However, even after 1973, the Forex market was reserved for big players: large commercial and investment banks, governments and central banks, hedge funds, and high net worth individuals. In other words, small traders couldn’t take part in the world's largest financial market, as they lacked the required funds. However, everything has changed over the last three decades. The advancement of the internet and technology supported the growth of the retail Forex industry, in which retail traders can trade on the Forex market on their computer with a relatively small capital outlay.
Trading on leverage has played an important role in the prominence of the retail Forex industry. With the help of leverage, Forex traders are able to open a much larger position than their trading account balance would otherwise allow. This reduces the need to invest a large sum of money in the market, but also increases the risk associated with trading, as leverage can magnify both your profits and losses.
How much to invest in Forex
So, how much money do you need to trade Forex? The minimum amount needed to trade Forex depends on a variety of factors, such as your trading style, available funds, average Stop Loss level, required minimum deposit for your broker, level of experience, and so on.
In any case, you should never invest more than you’re comfortable losing. Trading financial markets involves a high risk of losing your funds, and you don’t want to invest your entire life savings into trading.
Your trading style also plays an important role in determining your Forex starting capital. In essence, scalping requires a significantly smaller initial cash outlay than swing or position trading. The reason for this is the relatively small size of Stop Loss levels in scalping, which combined with leverage allows you to maintain enough free margin even when a trade goes against you. Day trading, swing trading, and position trading, on the other hand, require substantially larger Stop Loss levels which could be hard to maintain with a small trading account. Avoiding a margin call and maintaining enough free margin is always easier with a larger account size.
Your broker of choice can also ask for a Forex trading minimum account size in order to open an account. While many brokers accept minimum deposits of as low as $10, bear in mind that some brokers can ask for hundreds, or even thousands of dollars. If you’re trading on a budget, make sure that your favourite broker will accept your limit of starting capital.
Finally, experience is also a crucial factor that influences the size of your starting capital. If you’re a beginner, you could start with as low as $100 to get a feeling for the market when trading with real money. On the other hand, if you’re consistently profitable and have years of trading experience, you can afford to invest as much as you’re comfortable with.
Pros and cons of demo trading
Speaking of how much money is needed to start trading Forex, we have to mention a risk-free way of trading which doesn’t require any initial cash outlay – demo accounts. Demo trading is a great way to get your feet wet on the Forex market, but there are certain limitations concerning demo accounts which I want to cover in the following lines.
While demo accounts are great to place a few trades, get familiar with the basic tools of your trading platform, and learn how to calculate position sizes, as soon as you understand these basics you should consider opening a small real account to get a feeling of what it is like to trade with real money.
Forex trading with little capital
When discussing how much money you need to start Forex trading, we cannot conclude our article without mentioning the pros and cons of trading with a small trading account balance. The truth is that many traders are not able to afford a large account, either because of a lack of funds or insufficient trading experience. So, here are some pros and cons of having small account sizes.
1) You need to keep an eye on your free margin – If you’re trading on relatively high leverage, chances are that you will quickly deplete your free margin. When this happens, you’ll receive a margin call from your broker and all your open positions will be automatically closed at the current market rates. Make sure that you always have enough free margin to withstand negative price fluctuations. The following table shows the required margin depending on your leverage ratio. Any remaining amount on your trading account after you deduct the required margin represents your free margin.
2) To make a considerable profit, you need to increase your risk-per-trade – This can lead to an accumulation of losses which could eat up a large portion of your trading account. The following table shows how much money you need to make to get to your initial trading account size once you lose a certain percentage of your account.
As the table shows, losing 50% of your trading account size requires a return of 100% to get back to your initial balance. This can be a tough journey!
3) Small account sizes limit the number of open trades – This point refers to the first point which talks about free margin. Each trade opened on leverage will decrease the amount of your free margin, and a small account size simply can’t handle a portfolio of trades.
4) Small accounts are a great way to learn proper risk management and acquire a disciplined approach to trading - If you learn the basics of risk and money management on a $500 account, you can apply the same principles to a $5,000 one – there’s no difference at all.
So, how much money do you need to start trading Forex? As you can see from this article, there is no universal answer to this question. The amount of money needed to start trading Forex depends on your trading experience, trading style, the average size of your Stop Loss levels, and your available funds. In essence, short-term trading styles usually require smaller stop loss levels, which in turn can be traded with a smaller account size. On the other hand, longer-term trading styles, such as swing or position trading, are hard to trade with small account sizes as they require larger stop loss levels. A larger stop loss asks for enough free margin to withstand negative price fluctuations.
If you’re still asking yourself “how much money do I need to start trading Forex”, let’s get a bit more specific. If you’re a beginner just starting out in the markets, start with a demo account to get a feel for trading and to become familiar with your trading platform. Once you grasp the basics of trading, invest in a small amount to start trading with real money and learn to manage your emotions when trading. After you gain experience and start seeing positive results from your small account size, you can start to increase your trading account size by adding additional funds to your trading account.