One of the questions I get from new forex traders looking to start trading real/live forex trading accounts is this:
How much money do you need to trade forex?
Now, the answers I will give you is based on my own experiences and I will tell you the good and the bad of what I’ve found out for myself.
So what do you think?
How much money do you need to start as a trading capital to start trading forex?
I’m not talking about ” how much money do you need to open a forex trading account or open a trade.” That can start from $40 to $500 and above.
But what I’m talking about here is ” how much money do you need to trade sensibly.”
How much money do you think you need in your live forex trading account to start trading sensibly?
Now, I have to be honest with you:
Some of the amounts of money I’ve seen get thrown around in forex forums and websites asking if that amount of money is a good amount to start trading forex with is absolutely ridiculous.
Please don’t be offended and I don’t want kill your enthusiasm.
But I’ve seen amounts of $50 or $100 or $500 or even $1000 as a trading capital being thrown around thinking this will make you are reliable forex income for years to come.
It just doesn’t work that way.
And I will tell you why soon.
How I Got Started With Live Account For Trading
Let me tell you a little bit of story of how I got started with live account for forex trading.
I started getting interested in forex trading back in 2006 & 2007.
So that year, I spent a lot of time reading about forex trading and educating myself as well as demo trading to get familiar with the MT4 trading platform.
In 2008, I finally opened my first forex trading account with $3,000.
Now to be quite honest, it wasn’t all my money: I put in $1,000, and I convinced other 3 friends to contribute the remaining $2000 divided equally among them.
Call it beginner’s luck but somehow I managed to make profit on this live trading account, increasing it by more than 100% profit in the first 1-2 months.
Then I got greedy.
At the end of the 3rd month, I lost all the profit as well as the trading capital.
That kinda suck, doesn’t it?
I don’t know what trading systems I used or what kind of money management I used.
Heck!
I didn’t really know about trading with price action then!
I did a lot of things wrong:
- I was over trading, over leveraging myself to the hilt compared to the amount of money I had in my live account
- I was risking too much per trade: 5% to 10% risk per trade. When the trade went well, I made lots of money, when it went bad, I lost lots of money. I didn’t really understand trading risk management.
- I really didn’t know what trading system I was using: I think it was a kind of situation where I look at the chart and think to myself: Oh, this chart looks like the price is going to go up. So I’d buy. If I thought that the price looked like it was going to go down, I would sell.
- My trading was really all over the place.
So was $3,000 trading account the right trading account size for me to start trading forex with?
Well, to an extent, yes.
Over the years, I’ve increased my stake up to a maximum of $10,000 on a few occasions. And the same result: I lost it all.
Then bruised and battered, I would quit forex trading for a while.
Thank God for my job, I can still pay the bills, put food on the table and keep the wife happy!
Then one day I would open the mt4 trading platform just to see how the forex marketing is going on the charts.
Next thing I know, I would deposit sums of $250 up to $1000 just to trade with a small amount “for now” and see how it goes.
Losing $250 or $1,000 wouldn’t hurt too much, would it?
Wrong!
Over the course of the year, when I add up all those “little” deposits that I’ve made to trade forex on an ad-hoc basis, and they would vary between $5,000 to $10,000.
🙂
Painful. Not funny at all.
You see:
If I lose $250, I’d most likely lose it within 1 week. $1,00o would probably take 1-2 weeks fro me to get greedy and blow it all up.
Did I make profits on those trades?
Heck, I did!
I’d trade them to 100-200% profit and then so I’d like to increase my account fast, so I’d take large risk per trade to make more and all it takes is one trade to go wrong and I’m back to zero!
I Have A Problem With Trading Smaller Forex Account Sizes
The problem for me is now is that, psychologically, I am not satisfied with trading 0.1 lots or 0.01 lots which would be typical if you have an account of at least $250 up to $1,000.
I’m not satisfied with making profits of $10 or $50 or $100 which would be typical of trading such smaller sized forex trading accounts.
Why?
Because I’ve traded larger account sizes between $3,000-$10,000 and I’d rather trade an account size where I can have the chance to trade 1 standard contract and risk an amount significantly larger to make a larger profit.
I just don’t have the patience to grow a $250 forex trading account to $5,000.
That’s my nature and that’s why I’d do not like to put myself in that situation again.
For example, I will place a 0.1 contract trade on EURUSD and make $250 profit. Then a voice inside my head will be saying: “Man! If I traded 1 contract, my profit would have been $2,500!”
So every time a place a trade and make a small profit, all I will hear in my head is “If I had the money to trade 1 contract, my profit would be $x,xxx!”
So eventually, I will see a trade setup, take a very large risk on one single trade in the hope of making it big so that I can increase my trading account fast and guess what happens?
It turns out a big loss for my smaller sized trading account which wipes me out and I would not have sufficent capital to open another trade again.
That’s why: for me, the forex trading account sizes that I’d be happy to trade with are any amounts form $5,000 and upwards.
The Issues With Trading Smaller Account Sizes
Now, I know, some of you may argue that the account size does not matter, whether you are trading with a $250 account or a $1m account.
A risk of 2% per trade on each account is simply the same thing (except that the amount risked will vary).
And so, anyone with good risk management and trading practices can increase a small stake of say, $250-$1000 trading account up to a significant over time aided with the power of compounding.
I agree…it is quite possible.
For me, I just don’t have the patience to trade a small account because my expectations are not satisfied with trading a smaller account.
I would like to end this post with and interesting article which sums up much of what I was going to write anyway. This was from a trader David Cox In Trader Laboratory Forum:
Trading With Small Account Sizes
Now that regular forex trading activity has made its way into everyday households, retail traders have been able to enter the market with the ability to execute high leverage levels with very few limitations.
But the unfortunate reality is that most forex traders are caught up in the hype and believe that quick riches are possible even when starting with the smallest account sizes.
We have even started to see forex brokers offering micro accounts with minimum deposit sizes of $25 or less.
This has democratized the trading environment but it has also made many traders with small account sizes vulnerable to quick market reversals that can wipe out an entire savings balance.
For these reasons, it makes sense to assess the rules and tools smaller traders must utilize in order to stay in the game and keep their accounts growing.
There are many market experts that will actually suggest there are no real differences when trading, and that a smaller account should be approached no differently than large institutional trading accounts.
But while this is largely accurate, there are still some things that smaller traders must keep in mind in order to avoid a margin call situation that could deplete your entire trading account.
Starting With Realistic Expectations
The first problem that plagues most new traders is the problem of unrealistic expectations. This problem can take many different forms.
But in most cases, you will see a new trader with a small account get a few successful trades in a row and then start to expect that those results will be duplicated forever.
These traders will then start to do the math and figure out how much money can be made each day, week, month, or year.
This is destructive, however, because it is taking your mind off of what you should actually be doing (analyzing the market and isolating high-probability opportunities) and centering it instead on scenarios that could make you rich with little effort.
Markets are never this consistent, and there will be always be situations where you do better or worse than you have originally expected.
Trading projections are generally not very useful (especially in the early stages) because there are going to be many events for which you are unprepared and many market scenarios that might not necessarily conform to your original trading plan.
The unfortunate reality is that you are not going to be able to turn a $500 account into $1 million in a month or a year.
Even if you max-out on your available leverage, these are unrealistic expectations that should be disregarded immediately if you plan on being an active trader for the long run.
Large/Small Account Sizes: Similarities And Differences
At the same time, markets are markets and trading is trading.
The argument can be made that a $500 account should be traded no differently than a $1 million account (other than the fact that trade sizes should be proportionately smaller).
There is a good deal of truth to this, because the probability for a given chart pattern will not change depending on the amount of money that is in your account.
In these ways, large and small account sizes are essentially no different as long as you keep your risk percentages to appropriate levels.
(Conventional wisdom here suggests that you should never risk more than 2% in any one position.) It is also important to remember the characteristics of the markets you are trading.
One example would be differences in the ways gold prices vary relative to currencies.
When viewing the market in this matter, the real issue is the strength of your strategy rather than the size or your position.
The key here is to view your account in terms of percentages, rather than in Dollar figures.
In other words, look to make back your 2% on the trade, rather than trying to make $100 or $1,000 on your trade.
It is amazing how often this mistake is made, as traders start to look at the forex market as a source of income rather than as a living organism that does not care about whether you win or lose (or if you have made enough money to cover your monthly bills).
It is also another reason why options trading strategies might even make more sense for new traders.
Forex trading simply doesn’t work like that and if you expect to stay in the game you will need to view your balance in terms of percentages rather than as a potential Dollar figure.
Stop Losses and Market Anomalies
Large accounts are better positioned and better able to weather market anomalies.
As a personal example, I remember being short the EUR/CHF when the Swiss National Bank (SNB) decided to construct a price floor at 1.20.
This was done to prevent excessive strength in the CHF but the move was largely unexpected and took many traders (myself included) by complete surprise.
I was in front of my trading station when this occurred and I saw prices climb by more than a thousand pips in minutes.
I did not have a stop loss in place when this move occurred and this created the biggest loss of my trading career.
Fortunately, my position sizing in this case was relatively small and I was able to avoid the total depletion of my account.
(Chart Source: CornerTrader)
But what would have happened here if I was just getting started?
Would I have been able to withstand the losses taken by such an unexpected move?
Prior to that day, I never would have guessed that markets (especially the EUR/CHF, traditionally a low-volatility forex pair) could move 1,000 pips in a day — in any direction.
Of course, I was wrong in this case and the mistake turned out to be very costly.
For these reasons, stop loss placement is much more important for those with small account sizes as there is much less flexibility and margin for error.
The market can (and eventually will) surprise you and destroy your expectations.
For those with small trading accounts, proper preparation here (a stop loss) is vital and could potentially be the only thing that keeps your account active when a market anomaly occurs.
Conclusion: Does Trading Account Size Matter?
Again, quoting David Cox, here’s what he had to say:
So here we come to the ultimate question: Does account size matter?
Unfortunately, the answer is a vague ‘yes and no.’
“Having a small account size means that you will absolutely need to take certain precautionary measures (ie. having a relatively conservative stop loss that is in place),” said Sam Kikla, markets analyst at BestCredit. “This is the only way to protect your account from market anomalies that can erase all of your previous gains in short order.”
Another factor to remember is that leverage is much more dangerous when your account size is small.
There is absolutely no reason a trader with a $500 account should ever be taking 200:1 leverage. At this rate, it would only take a small string of losses to completely eliminate your ability to continue trading.
On the plus side, smaller traders that obey these rules (and focus on percentages rather than Dollar figures) will have access to the same returns as those with institutional accounts (again, in percentage terms).
The real issue here is whether or not you are taking an overly aggressive approach to your trades. This is not a viable option for those with smaller account sizes.
So, there are important differences that can put smaller traders in a more difficult positions.
The positive here is that most of these difficulties are removed when you keep a conservative trading approach, use active stop losses, and structure your trades so that they are working as a percentage of the whole
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