How much money do I need to trade forex?
There are various amounts you need to invest depending on the broker you decide to trade with. Some brokers offer the ability to trade with a mere $25.00, however most require minimum deposit of $250. These types of smaller investments are ok to start you off, however, they will not result in any serious profits. Becoming a serious forex trader, your initial investment will play a colossal role when determining your success.
There are many brokers in the FX industry, and with that comes a number of different traders, that trade in many ways that do not always require a minimum deposit of over $5,000. Day traders for instance will not need to trade with the same capital as a swing trader does. One will need to define ones’ goals: are you looking for a more of a serious income or to simply grow your trading account?
Why the initial investment matters?
There is a trade difference if you start with $250 versus $2000, and yes it does matter. One of the more significant problems new traders face is being under-capitalised. When you start trading you goal is to have some sort of profit or income from your investment. This cannot be accomplished on a $20 account. Most new traders have no patience to allow their accounts to grow, and with small deposits you risk far too much on each trade, and thus risk to lose the entire initial investment.
While there are other brokers that offer you a trading bonus, which is an additional boost to your capital to get your trades going. This can amplify your trading capital allowing you to open more trades, however keep in mind not to over extend yourself per trade, look at a market exposure ratio of 2-5% of your account to be safe.
Another recommendation when receiving a broker bonus is to read the terms and conditions to fully understand them. Most brokers do require you to trade a certain volume in order to withdraw funds from the account. All-in-all a welcome bonus is a great way to increase the available trading budget.
Leveraging your trades
Brokers allow traders to use leverage to assist in increasing the available position size of each trade, while they have invested a small amount of capital. This fraction of what it costs to open a trade, that you personally invest, is called margin. Trading on margin makes the amount you either gain or lose seem very high in relation to what you invested.
For example, this is how leverage and margin work:
A leverage of 10:1 would mean that a deposit (margin outlay) of $100 allows you the same trading potential as if you had invested $1000.
Should you want to open a position and buy 1000 shares on ABC Ltd. and the current price is $1 per share it will cost you $1000. If the share price increases by 20c (per share), then you could sell your 1000 shares at $1.20 and make a $200 profit.
Should you use leverage of 10% you would pay $100 out of your margin, and the position would be ‘worth’ $1000 (10% x $1 x 1000 shares = $100). Should the share price rise again from $1 to $1.20 you would still make the exact same profit however you only exposed $100 not $1000 of your equity to the markets therefore decreasing your risk. Also, the return on your investment was 200% with leverage as opposed to 20% when using only your own funds.
AvaTrade offers up to 400:1 leverage, with over 250 instruments the leverage will differ per instrument. However, it is not always necessary to take it in full, the more you invest the less leverage you will need.
Having an operational budget of around $5000 allows you as a trader to firstly, open bigger positions, and secondly, enter the markets however volatile, and hold positions for longer even if they are going against you, without the fear of depleting your account too fast. Why, you ask? As with higher margins, you have the capital to allow markets to recover, as well as the possibility to enter into a profitable price range easier.
To learn more and trade better AvaTrade allows you to adopt trading skills on how to manage your trading budget and understanding position size. Please refer to our articles for a more in depth explanation on these essential topics.
The first rule when you are entering the forex world is: you should never invest money that you cannot afford to lose. Be certain before getting your feet wet, that you learn as much as possible, practice on your free demo account, and then save enough to open and maintain a substantial account. If necessary, we will offer you high leverage and excellent bonus to get things started.