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 a 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 who 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 one’s goals: are you looking for a more 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 your 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.
Keep in mind not to overextend yourself per trade, look at a market exposure ratio of 2-5% of your account to be safe.
Leveraging your trades
Brokers allow traders to use leveraged trading 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, thereby decreasing your risk. Also, the return on your investment was 200% with leverage as opposed to 20% when using only your own funds.
Friedberg Direct offers different levels of leverage for different asset classes.
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 Friedberg Direct allows you to adopt trading skills on how to manage your trading budget and understand position size. Please refer to our articles for a more in-depth explanation of these essential topics.
The first rule when you are entering the forex trading 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.
Sign up today and enjoy the benefits of trading with a regulated, Canadian broker!