Imagine you are now a full-time trader earning a living from trading the global forex markets. Doesn’t it feel great? No bosses to answer to and the potential for unlimited upside.
While this may be a pipe dream for many, thousands of traders are living this reality. But what did it take to get there and more importantly, how much money do you need to start forex trading? By at least covering the basics of what you need, we can then discuss the potential of turning your trading skillset into a full-time career.
Trading the forex markets requires a lot of skill, patience and the ability to learn quickly from your mistakes. And yes, even professional traders make mistakes from time to time.
The allure of trading forex, due to the leverage you get access to, is that you don’t need a lot of capital to get started.
At Axi, you can potentially access leverage of 100:1 depending on the country you are trading in. This means, $1,000 can control in excess of $100,000 worth of FX trades.
But you don’t want to be trading at such high levels of leverage. In this article, we’ll be talking about sensible risk management ideas to help minimise your exposure to wild equity swings.
Your goal when starting is to create and test trading strategies that allow you to scale it up to appropriate position sizing, so much so that you have an opportunity to earn regular cash flow from your skill.
The beauty of trading with Axi is you can trade micro position sizes. A micro position of $1,000 will allow you to test your trading ideas on small positions such that if you lost ten trades in a row, your account would still be intact.
Let’s say you had ten losses in a row of 50pips each; your account would be down $50.
Losing ten trades in a row is not nice, but your focus should be on the lessons you learn while trading small with limited risk at play.
Long term, it is these early lessons that will be beneficial to your bank balance down the track.
You can. However, your options will be limited, and unless you will trade recklessly (which is not recommended and could set the wrong habits), your returns will be extremely limited. While a return of 2% on a single trade might sound like a great result, it will be less motivating once you realise it only resulted in a $2 gain. While it can be a good exercise without risking too much of your real funds, there is the danger that - unless you are already a disciplined trader - you will get carried away and start risking a far larger % of your capital in order to maximise those Dollar returns.
Of course, the solution to this is not to deposit more funds if you are not ready for it or cannot afford to lose them. Instead, you can return to your demo account and test your strategy there until you feel comfortable trading again.
Another good rule of thumb when starting is to never risk more than 1% of your trading capital in any one trade.
Here is a table showing what a 1% risk per trade looks like relative to your starting balance.
For those who are risk-averse, you may want to go down to 0.5% risk per trade.
|Trading Capital||1% Risk||0.5% Risk|
As you can appreciate, losing $2.50 to $5 per trade when starting should be within most people’s comfort zone. Losing is never nice, but by keeping the losses small, we can get back on the horse and try again.
Therefore, it would be fair to say that a $1,000 trading account is fine if you are looking to trade micro positions and risk no more than 1% per trade.
Remember, your goal with an account this small is to build strategies and methods that have an edge and which allow you to scale up over time to a position size that could generate steady cash flow.
One of your first goals when trading is to get to breakeven. Exciting goals, right?
Keep the big picture in mind when you start trading forex. If your big picture goal is to trade full-time and replace your current income, then be prepared to hone your trading skills for 7-10 years first.
So, in this blog post, we are going to assume you are willing to play the long game of keeping your losses small and your foundation rock-solid.
Every time you make a trade, you will incur a cost.
If you are trading with an Axi pro trading account, you will incur a $USD3.50 per side cost or $USD7.00 round trade for each full lot.
Here is a breakdown of your round trip brokerage costs from a micro lot to a full lot when trading on the Axi pro trading account.
Trading costs on our pro account
|Trade Size||Round Trip Cost|
If you trade once per day or let’s say, 20 times per month, and each trade is one micro, it means your total brokerage for the month will be 20 x $0.07 or $1.40.
On a $1,000 account size, you would need to make 0.14% per month to cover your trading costs.
But if you leverage up too much and trade full lots on a $1,000 account, then 20 trades at $7 round trip would be $140. That’s 14% on a $1,000 account to break even.
You can see in the table below, how your account size affects the percentage gain you need to make each month just to break even based on $140 per month in brokerage expenses.
|Account Size||Expenses||Break even %|
You can draw a few conclusions from the information in the table above:
|Account Size||Expenses||Break even %||$1,140 per month|
Now things start to get interesting.
If you want to cover your expenses and generate $1,000 profit per month, you’ll need to make 114% per month on a $1,000 account.
How realistic do you think that is?
Considering most large funds look to make 10-15% per year, you’ll need to adjust your expectations.
Covering your monthly expenses and generating a profit of $1,000 requires smart planning, especially if you are going to trade in a risk-averse manner.
First of all, you should understand what you are trying to achieve, your life circumstances and how much risk you are willing to take. Trading is risky, and you should not trade with money you cannot afford to lose.
Nowadays, it is possible to start trading forex with small amounts of money - even as low as $50. However, you need to understand the limits of starting with a very low balance and determine whether it will help your development as trader.
For example, with a low balance of $50, you will not have much room to play with your position sizing or implement sound risk management. A good risk management rule is to determine in advance how much you are willing to lose per trade - this could be 1% for example.
With a balance of $50, you would be allowed to risk 50 cents per trade, which doesn't give you much room given that the smallest position size is 1 micro lot.
This is especially the case in day trading, where you might need to have multiple positions open at the same time to follow your strategy.
Before you jump into the market with a larger account balance, you need to ask yourself the questions we raised at the beginning (what I am trying to achieve with trading? what are my life circumstances? how much can i afford to lose?).
Furthermore, you need a proper trading plan that includes rules around risk management. If you do not feel comfortable yet, you can always return to your demo account.
While day trading can be a full-time job for some, it doesn't mean that all day traders are constantly glued to the screen, waiting for the next trade opportunity. Some traders prefer to only trade during specific hours (let's say the London and NY Open).
While they might not be trading actively outside of those two time periods, they could still be working on their plan, analysing past trades and doing general research that will help them improve. Day trading can be intense, but you should not assume that you need to be constantly on alert for new trades. It is important to have some downtime to regain your focus and to review your past trades.
The forex market is popular for day traders worldwide because it is open 24/5, highly liquid and generally a fast-moving market. The leverage traders can access is far higher than in the stock market, which can be a double-edged sword.
Day trading share CFDs is different. Due to the low leverage available, capital requirements will be higher. Furthermore, unless you are trading different markets (e.g. Japanese / UK / US stock market), you will be limited by the trading hours of the specific exchange.
Traders seeking high risk and trying to profit from high volatility and sudden price movements might find forex trading more suitable for their needs.
Hopefully, we have been able to answer your question of how much capital you need to trade Forex. You should now be clear on the objective of getting to breakeven and then the returns needed to generate positive cash flow.
Start exploring the forex market and use this guide to understand how much to first deposit into your live trading account!
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
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