Before thinking about how much money you need to trade Forex, there are other things to be considered. Your first consideration is to open an account with a Forex broker and, for this, we advise looking for a regulated broker.
Another significant factor for how much money you can make from trading Forex is how much money you have to use as trading capital. You can make a lot more money if you have $20,000 as your trading bank, compared to, say, a few hundred dollars.
It's essential to be realistic. It takes time to learn how to trade Forex. No matter what size balance you begin with, the first goal is to make consistent profits. For this, a helpful step is to practice with a demo account.
To download the demo trading platform, go to your broker's website and download the file to your PC, Laptop or Mac.
Meantime, learn as much as you can. Perhaps invest in a Forex training course, read books by experts and watch videos. Time spent educating yourself on Forex will reap the rewards later on.
Once you are consistently profitable and confident to enter and exit trades, then it is time to deposit your money into a regulated broker account and get started for real.
There are so many different ways to make money from trading Forex, and not all traders think or act the same way.
You may prefer scalping the Forex market, meaning you trade on the lower timeframes, such as the 1-minute, 5-minute or 15-minute charts, entering and exiting trades multiple times for small profits. To be a Forex scalper, you need to spend time studying the charts and looking for trades.
Scalping Forex is unlikely to be suitable if you work full time and only have an hour or so in the evening.
If you have less time, you are more likely to be profitable from day trading or swing trading, where you are looking for bigger moves in the market and can trade on the daily, 4-hour or 1-hour chart.
The financial requirements for scalping, day trading, or swing trading are very different.
How Much Money Do I Need to Trade Forex? – Why it Matters
Why is it important to know how much money you need to trade Forex? How much does it matter if you only have $200 or $5000 to use as capital? Well, it matters a lot.
Earlier, we mentioned the importance of opening an account with a regulated broker. The truth is, there's a lot of unscrupulous brokers online telling novice Forex traders that they can open a Forex account with a few dollars. Don't be tempted to go down this road because it is far from realistic.
You may rationalise that it's just a few dollars, so it doesn't matter if you lose it. But that's not the point. If you are serious about making money from trading Forex, why not choose to do it properly from the start.
Something you may not yet have considered is the subject of risk management. The guidelines for trading Forex is to risk no more than 1% of your capital. If you start with $100, you can, therefore, only risk $1 per trade. You can only trade micro-lots, which means the returns will be minuscule.
It's the slow, slow road to generate an income.
It typically happens that novice traders end up risking too much on trades, perhaps having multiple trades running, and suddenly find they get a margin call from their broker. Game over.
If you have less than, say, $500 to use as capital, you may quickly become disappointed by profits of only a few dollars a day. But, this is where novice traders go wrong.
How to Make Steady Profits in Forex by Compounding
Starting with a small trading bank requires a mindset shift. Rather than feeling discouraged about the monetary gains, start thinking in percentages.
As an example, imagine you start trading Forex with $200. You can risk $2 per trade, and you make a profit of $2 a day, and you do this for five days.
By day five, you have generated $10. In percentages, this is 5%, which is a respectable return for professional Forex traders.
Week two, you have $210 to trade.
But, you've worked out that you can increase your risk to reward ratio (RTR) to 2 to 1. So, for every $2 you risk, you aim for a return of $4.
This strategy is a good plan.
For the next five days, you make $4 a day. By the end of the week, you have increased your account by $20.
You have gained 10% on your account, which is an impressive return for any Forex trader.
You now have $230 capital, and it's only week two.
If you continue with this steady progress week in and week out, compounding will grow your account. Of course, in reality, not every week will be a winning week. Losses are part of being a Forex trader.
The downside to having a small trading bank is that you are limited in your style of trading. With such a low monetary risk, swing trading is not the best option as stop losses need more room for the trade to breathe. $2 may only be 10 pips or so when you need, say 50 – 100 pip stop loss.
For swing trading, having a tight stop loss will result in more losses.
How Much Money Do I Need to Day Trade Forex?
Day trading may be an option if you have the time available to spend at the charts.
The 1-hour chart could work well, as long as you know the overall trend by checking the higher timeframes like the 4-hour and daily chart. Then, aim to go with the flow of the market and not trade against it.
Realistically, a balance of less than $1000 is challenging for day trading Forex. Ideally, $2000 to $5000 gives you more scope to make better returns and look to make an income from trading Forex.
If you open a broker account with $2000, risking 1%, your risk per trade is only $20.
A 2 to 1 RTR can potentially make a return of $40 or more per day.
Another way to increase profits is to keep the risk to 1% but increase the RTR to 3 to 1. Now, you are still only risking $20 but can make a return of $60 or more. It also means you can have three losses and only return to breakeven.
Already, $40-$60 a day from a $2000 account begins to materialise growth of your initial capital. Making an income from Forex trading now seems like a genuine possibility.
Hold a steady pace as your Forex profit builds, and don't be in a rush to make the big bucks. Your patience will pay off over time.
Once you have built your account to $5000, now you are risking $50 per trade. You are returning $100 profit (RTR 2 to 1) to $150 profit (RTR 3 to 1) per trade.
Suddenly, the returns make it possible to imagine making a long-term income from trading Forex.
At this stage, you have two choices. Assuming your profits are consistent, you may:
- Keep building your account to $10,000 – the bigger your trading capital, the more money you can make. The idea of your capital is to use it to make money and not withdraw too much that it limits the size of your profits
- Withdraw a little each month – You've worked hard, and you're in it for the long haul. Withdrawing a little profit each month has psychological benefits. It shows you that you ARE making an income from trading Forex.
How much you withdraw is your personal choice, but keep it small, like 5%-10%. Use the money for a treat rather than for paying bills.
It's easy to see that with starting capital of $2000 or more, the daily gains can quickly grow your Forex account.
If you don't have $2000 to start trading Forex, it will take longer to grow the account to the level of withdrawing a little each month. The same rules still apply but, mentally, you have to accept it may take a year or more before your capital is big enough to create daily profits from Forex trading. But each gain draws you closer to taking a regular income from trading Forex.
Before you start trading Forex live, spend time trading in a demo account so you know that you can make daily profits from Forex trading before going live.
Read Also: 10 Day Trading Strategies for Beginners
How Much Money Do I Need to Swing Trade Forex?
Swing traders hold trades for a few days or weeks. In some cases, professional swing traders may hold a trade for months.
Swing trading is ideal for traders who do not want to sit staring at the charts for hours at a time. For instance, swing trading would suit you if you work full-time and can only do your analysis in the evening, after work.
The idea of swing trading is to catch the longer-term moves in the market.
It isn't for the faint-hearted.
The price can swing up and down, kissing your stop loss and looking as if the trade isn't going to work out. A swing trader learns to hold their nerve and stay away from the charts to avoid acting impulsively.
Depending on the trade entry point, your stop loss could be 30 – 100 pips. As with any Forex trade, the trader seeks to find the best entry point with the least risk.
Ideally, $5000 would be an excellent point to start. It means you can take the time to hold trades for more significant returns but still keeping your risk at 1% per trade.
If you don't have $5000 but still want to day trade or swing trade, you can read Blueprint for day trading Forex with $1000 or less.
The other benefit of swing trading Forex is that you will take fewer trades, thus decreasing your risk.
One or two trades a week could enable you to hit a reasonable target. Less time spent in the market is a positive thing. Professional Forex traders say that it isn't the trades you take that make you a successful Forex trader. It is the trades you don't take that makes the difference.
It's beneficial to be familiar with the currency pair you are trading because some currency pairs are more volatile than others, which means a trade may need a larger stop loss or a better entry price.
A helpful indicator for measuring volatility is the ATR indicator.
Check Out: How Much Money Can I Make Swing Trading?
The ATR Indicator for Day Trading or Swing Trading Forex
ATR is an acronym for Average True Range.
It is an indicator that measures market volatility. It derives from a given timeframe like the 14-day simple moving average of a series of true range indicators.
Use the ATR indicator to measure volatility to calculate the size of your stop loss and target profit. For instance, if EUR/USD had an ATR of 9 candles on the daily chart, volatility is low, and the price could be consolidating in a range. Taking a trade at this juncture may result in days of no activity on the charts.
It would be preferable to find a currency pair with some momentum and volatility.
How Much Capital Do You Need for Longer-Term Forex Trades or Investing?
Whether you are trading short-term or long-term, the same risk management principles apply, which means risking no more than 1% to 2% of your capital.
Ideally, for longer-term trading of Forex, a starting balance of $4000 - $5000 is preferable. With trades that you may be holding for weeks or even months, your stop loss will be further away from your entry price. Your stop loss could be 200- 500 pips if you aim for significant, long-term moves in the market.
As an example, imagine a target of 1000 pips, and a stop loss of 300 pips. On a $1000 account, your trade is a micro-lot of $0.10. Your risk is $30 to $60, and your return could be in the region of $150 or more.
That is too much to risk on a small account. 1% of $1000 is $10 and 2% is $20.00.
You have two choices:
- Look for a better entry where you can have a smaller stop loss - the price will always correct after a significant move. Wait for the price to return to support or resistance or the last low or high, and then wait for a clear signal for entry. Often, the price will return to the daily high or daily low.
- Look for another trade with less risk – possibly a less volatile currency pair or a pair with a better entry point with less risk
No two trades will ever be the same.
Professional traders always look to minimise risk for maximum return, and it's a great principle to adopt. Focusing on protecting your trading capital is a sure way to get ahead and make consistent profits in Forex.
The more capital you have, the greater the potential return. When holding trades for weeks or months, consider the size of the return. With $1000 or less, a trade held for a month may only return, say, $100.
Whereas starting capital of $5000 may return $500 or more with a risk of 1%.
As long as you are consistently profitable, it pays to have more working capital to trade Forex.
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Recap of How Much Money Do I Need to Trade Forex
At all times, be realistic about what is possible from your trading efforts.
If you are a novice Forex trader starting with $500, allow at least one year to eighteen months to get over the inevitable mistakes you will make as you learn to trade Forex.
Yes, it seems like a long time to invest for no return on the time investment. But think of it as an apprenticeship. The time spent now, taking it slowly, learning as you go, will ultimately make you a better trader.
Have a good trading plan. But learn to accept losses as part of the process. Even professional Forex traders have losses. Losing trades matters less when you have a high RTR. You can afford to lose a few trades when your wins are significantly larger than your losses.
Once you are at the intermediate stage in your Forex education, you can add extra funds to your capital because, now, you know you can grow your account with low-risk Forex trading.
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Trading or investing in financial instruments such as Forex and EFTs may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.
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