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How much capital you should trade forex with
Written by: PaxForex analytics dept - Friday, 07 August 2015 0 comments
One of the decisions that all traders, especially new traders face is how much trading capital to trade with or how much money to deposit into their trading accounts. The simple answer to this question is as much as they can afford. The reason for this is that the amount of trading capital directly affects the markets that they can trade, and most importantly, the amount of risk that their trading has to endure in order to be profitable. Traders should never trade the money they cannot afford.
The amount of capital traders have at their disposal will greatly affect their ability to make a living from trading. In fact, capital's role in trading is so important that even a slight edge can provide great returns. This is because an edge can be exploited for large monetary gains only through large enough positions and replication (or frequency). A trader's ability to implement size and replication when conditions are right is what separates a true professional from less-skilled traders.
The reality says that all the people who want to start trading most likely it is because they 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.
A trader who deposits $1,000 can use $100,000 (with 100 to 1 leverage) in the market. This can greatly magnify returns and losses. This is fine as long as only 1% (or less) of the trader's capital is risked on each trade. This means with an account this size only $10 (1% of $1,000) should be risked on each trade. In the volatile forex market, most traders will be continually stopped out with a stop so small. Therefore, in this market traders can trade micro lots, which will allow them more flexibility even with only a $10 stop.
Consider professional money managers, the best ones who have been trading 10, 20, 30 years. They are happy to make 15 to 20 percent consistently per year. Fifty percent is a great year. But even the best have a bumpy road. No one makes money every month, every quarter, every year. The long term belongs to those who are not only skilled, but patient, determined, and are willing to sit on their hands much of the time.