Forex trading contnues to increase in popularity, but often for all the wrong reasons. There are plenty of misleading advertisments and statements when it comes to the amount of trading capital required in order to start trading forex.
When you run a Google search about what other traders think is necessary in order to succeed as a forex trader you will often find the following aspects mentioned:
- Good Trading Strategy
- Risk Management
All of the above are vital in order to become a good forex trader. One aspect which is not often discusses is trading capital. The majority of new forex traders open a trading account with their broker, but they do not fund their trading account properly. This leaves their forex portfolio with insufficient trading capital which will lead to losses guaranteed.
While there are plenty of advertisements which misguide new traders that you can get started with only a small amount of capital and still generate profits, you will not find a lot of places where you are being told what you do not like to hear. It is not possible to operate a standard forex portfolio with only $100 or $200 or even $500.
- In order to operate a standard forex account you should at least deposit $10,000 so you are able to not only trade, but also apply a proper risk management system where 2% does not mean you have to close your position 10 pips later.
Risk management is one of the most important aspects of portfolio management and you need to execute it which without sufficient trading capital is not possible.
What is a standard forex account?
- A standard forex account means that one lot is equal to 100,000 units of the currency or other asset you like to trade.
Here is an example:
Let’s say that you decide to trade one lot of the EURUSD and enter a long position at 1.2850. This means that you are buying 100,000 units of this trade and the total value of it would be $128,500 (100,000 x 1.2850). You may trade with leverage of 1:200 which means the margin requirement for this trade would be $642.50 ($128500 / 200). Each pip move will equal $10. How much trading capital do you need for a standard forex account?
Let’s take the above example and assume that your average pip loss which you tolerate is 75 pips. In case you would lose the above trade you would face a loss of $750 (75 pips x $10). Let’s further assume you apply risk management of 2% which means you will never lose more than 2% of your portfolio on any given trade.
- This would mean that a 2% loss represents $750 and therefore you need to have a minimum of $37,500 ($750 /2 (in order to know how much 1% is) x 100 (to arrive at 100%) in your standard forex account.
Most new traders will not trade one lot, but even if you trade 0.10 lots you need to have $3,750 ($37,500 / 10) in your standard forex account.
Unfortunately most new traders do not have this amount to start trading and forex brokers understand that which is why the creation of mini-accounts became popular. You can open a mini forex account at Paxforex in order to start your trading portfolio.
What is a mini forex account?
- A mini forex account means that one lot is equal to 10,000 units of the currency or other asset you like to trade.
Here is an example:
Let’s use the same trade set-up as with the standard forex account and trade one lot of EURUSD with a long (buy) entry at 1.2850. This means that you are now buying 10,000 units at 1.2850 for a total of $12,850 and trading with leverage of 1:200 your margin requirement will be $64.25 while every move of one pip will be $1.
How much trading capital do you need for a standard forex account?
- Let’s apply the same attributes as with the standard forex account which means a 75 pips loss would equal $75 which should be 2% of your total trading account. This means you need $3,750 in order to operate a mini-trading account properly.
Since you will not be trading one lot per trade and may stick to 0.10 lots you could fund your mini forex account with $375 as long as you do not trade more than 0.10 lots and will commit your portfolio to a 2% risk management protocol.
It is very dangerous to trade with insufficient trading capital for the following reasons:
- When you have insufficient trading capital you will not be able to manage your account properly
- Improper account management will lead to a lot of currency trades being exited prematurely at a loss
- Trading losses will lead to frustration and trades will be guided by emotions rather than analysis
- Increased trading losses due to early exits will lead to revenge trading which only leads to more losses
Therefore it is very important that you fund your account with sufficient capital and pick the account type which best suits your trading capital. Please be realistic with your profit expectations as well.