Minimum capital required to trade forex profitably
For the new trader, who doesn’t have capital, trading can be a huge problem. Pro trader will tell you that without $10 000 people do not need to trade and without $100 000 traders can not earn money on market. If an average monthly return for one-month trading (for pro traders) is around 1%-2% (drawdown less than 5%) than new traders need to understand that for-profit they need capital more than $1K.
Of course, new traders can start trading learning with a live account with $500. But is it enough capital to start?
In this text, I will try to give my personal opinion about minimum capital.
It is not advisable for day traders to risk more than 1% of the amount in their forex account for a single trade. However the trader should be flexible. Even some most reputed traders may make losses continuously. Hence if the risk for each trade is less, a losing streak will not reduce the capital significantly. The difference between the entry price for the trade and the stop-loss price, multiplied by the pip value and size of the position, is the risk for a particular trade.
Before we start I want to repeat something that I repeat often. Risk around 1% of capital is important because huge drawdown and loss of capital are very hard to recover. See Table below :
If we have 1% of portfolio risk per time in future we could have 10% till 15% drawdown. That loss we need to recover and on other side we need to decrease our position. With the huge loss, it is imposibbile to stay profitable.
Trading lots and pip value.
For a majority of currency pairs, the pip value is 0.0001 or one-hundredth of a percent. The major exception is a currency pair having the Japanese yen as the second currency, the quote currency, which will have a pip value of 0.01. The forex market movements are defined in terms of pips. For trading in forex pairs, usually standard, mini, micro or nano lots are considered, which have 100,000, 10,000, 1000 or 1 unit of currency respectively. If the USD is the second currency in the currency pair which is being traded, the pip value per lot type is fixed. The pip value will vary based on the currency pair and price, so knowing the pip value will determine the risk and position size.
Stop Loss orders
When trading in forex, it is important to specify a stop-loss, to reduce the loss of the trader, if the base currency value moves in a direction which is opposite to the direction in which the trader has bet. If the trader expects the currency price to increase, he will specify a stop loss of 10 pips below the current price and a similar amount of increase for stop loss in case he is betting on a decrease in the price
If a trader has only $100 or a similar amount in his forex account, he has very little flexibility while trading. Since he is risking only a small amount for each trade, he is also making only a small profit. Hence to make more profit and make a reasonable amount while trading, more capital is required. Increasing the amount for trading to $500 increases the flexibility of the trader. However, most day traders are able to make a profit of only $5 – $15 daily with this amount regularly. When the initial investment amount is increased to $5000, the trader can purchase mini lots and micro-lots since the amount of risk he can tolerate increases to $50 on each trade. Traders can make a profit ranging from $50-$150 daily based on their forex strategy.
How Much Money Do I Need to Day Trade Forex?
For many day traders, the foreign exchange (forex) market is the most accessible of the different financial markets since the initial investment amount is very low. usually, the investment required is $100, though in some cases, the initial amount is $50. While no minimum asset amount is required for day trading in forex, for the stock market day trading, the securities and exchange commission (SEC) has made it mandatory for traders to have assets of at least $25,000. Though the minimum amount required is low, the profit will also be less. Hence many traders wish to find out the Minimum capital to trade forex so that they can make a reasonable profit.
Ok, for stocks minimum capital is $25000. How much money do you need to trade forex?
If the average daily true range ATR is around 100 pips and day traders can risk a maximum of 50 pips. Let us assume that we trade EURUSD. Because risk is $50 (1%) than $5000 should be minimum capital.
So to sum up:
What is the minimum amount to invest in forex? The minimum amount to invest in forex to have drawdown less than 15% and the maximum portfolio risk of 1% is around: $5000.
How much do you need to start trading stocks? To trade stocks, the minimum investment is $25000 because it is the minimum capital for all major stocks brokers and SEC recomendation.
Based on the above analysis, the profit which a forex trader makes will vary depending on the capital he is investing in. The larger the initial amount invested, the greater the flexibility and profit which the trader can make. In my opinion, the bare minimum for forex trading is $5000. With that capital, new traders can feel comfortable during the trading. Of course, he/she needs to trade using micro-lots because of small capital. For longer-term investing trader need to have much bigger capital (maybe twice) so he/she can feel relax during the huge drawdowns.