How Much Money do You Need to Start Forex Trading

by Mar 19, 2020Forex Trading

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Even the Forex market is open market for all people it is not easy to define how much money do you need to start Forex trading as a starting capital. You need money to make money and in Forex you can have small amount of money and earn a lot.

Does it matter do you start trading with $100 or $1,000? Yes, it does and being under-capitalized is one of the most common problems traders face when starting with Forex trading.

This post will cover only the case where you want to invest real money. You can start trading on the Forex market without starting capital. The demo trading does not require you to invest real money and you can trade like on the real account.

Some brokers offers to start Forex trading with $10, $50 or $100 which is accessible to all people in a world. From the countries with low monthly income to the countries with higher monthly income.

Forex trading does not require that you have legal minimum amount of money but it is advisable to have some. Trading Forex involves risk which you should incorporate in your trading strategy.

But even it is possible with small amount of money to start Forex trading some would say it is not smart to do that. Why is not smart or is it fine to start with small capital I will explain in this post.

Have in mind that each person is different and some scenario will fit better to one person where to another person will not. You need to find the best scenario for yourself based on the trading strategy and the risk management plan.

 

Starting Capital in Forex – Risk Management

If you are a trader you should have a risk management strategy defined by which you open a trade. That risk management should protect your starting capital in Forex so you can stay on the market for longer period and to take the money from the market.

Risk management should define not to lose more than 1%-2% of your capital per each trade you open or per all trades open at the same time. And that rule should not be broken because you should have in your mind to protect your capital.

If you have $1,000 of starting capital on your Forex account with 1% of risk, you should not lose more than $10.00. If you have $10,000 of starting capital on your Forex account with 1% of risk, you should not lose more than $100.

Risk is defined by the difference between your entry price and the price at which your stop-loss order is activated, multiplied by the position size and the pip value.

Risk to Reward Ratio

On the other side you should have defined percentage for wining trades. You can have risk to reward ratio from 1:2 up to higher ratios.

If you have ratio 1:3 that means for 1% of risk you will have 3% of profit. When you open a trade with $1.00 of risk you will go for $3.00 of profit.

If you have $10.00 risk you will go for $30.00 of profit. Maybe these small amounts of profit are not large enough, you need to be careful that your emotions does not get involved. Emotions, as greed, can step in and change your risk to reward and eventually you will lose all your money.

 

Starting Capital in Forex – Pip and Lot Matters

To make a calculation how each trade will affect on your starting capital in Forex account you need to know what is a pip and what is lot size. The pip is small change in the price of the currency pair.

If you trade EUR/USD trading pair and the price changes from 1.2965 to 1.2966, the price is changed by 1 pip.

1.2966 – 1.2965 = 0.0001 = 1 pip

When you want to calculate what is the amount when the price change by 1 pip you need to do some calculation. This calculation is done by your trading station so you do not need to bother but it is ok to know how to do this.

Price Calculation

If you trade currency pair where U.S. dollar is on the second place(like EUR/USD trading pair, AUD/USD trading pair) and your trading account is funded with U.S. dollars, then 1 pip will be fixed and equal to:

Lot Size (Units) Pip Value
Standard Lot Size 1.00 = 100,000 $10.00
Mini Lot Size 0.10 = 10,000 $1.00
Micro Lot Size 0.01 = 1,000 $0.10

Now, if you have invested $1,000 and you open a trade with micro lot where 1 pip is equal to $0.10 you will need to define what is Stop loss level. Stop loss level is the price where you will close the losing trade.

If you define that you will risk 1% of your starting capital in Forex account, that will be equal to $10.00. To get from $0.10 to $10.00 you need to have 100 pips change.

If we take the price example from the above where the start price is 1.2965 we get:

1.2965 – 1.2865 = 0.0100 = 100 pip

This is the way how you should plan your trades when you plan to trade with risk management. You should stick to the risk management plan because it is the most important part of trading on the Forex market.

Starting Capital Scenario in Forex

Here I will show you how would look like when you have three different starting capital in Forex account. I want to show you in close what means having small capital and to help you define how much money do you need to start Forex trading.

For all three accounts I will use the same trading pair like before, EUR/USD trading pair with same trading starting price, 1.2965. The table shows how much each pip is worth when you use different lot size.

Lot Size (Units) 1 Pip Value
Standard Lot Size 1.00 = 100,000 $10.00
Mini Lot Size 0.10 = 10,000 $1.00
Micro Lot Size 0.01 = 1,000 $0.10

Scenario 1

Starting capital in Forex account is $100 and you plan to risk 1% of your starting capital with micro lot size where 1 pip is equal to $0.10. Micro lot size is the minimum you can open so this will be the most conservative approach.

1% of $100 is $1.00

The price must change by 10 pips because 1 pip is $0.10.

You can see that you are very limited on micro account. You can only have 10 pip change in the price before your Stop Loss is activated. That does not leave to much room when the pair is highly volatile. Highly volatile means that the price changes very fast.

This would mean that when you open a trade you would be closed very fast. If the price do not move in your favor you would lose that $1.00 very quickly.

Scenario 2

Starting capital in Forex account is $500 and you plan to risk 1% of your starting capital with micro lot size where 1 pip is equal to $0.10. Micro lot size is the minimum you can open so this will be the most conservative approach.

1% of $500 is $5.00

You need to have price changed by 50 pips because 1 pip is $0.10.

Now you are more flexible when you have 50 pips to spent. You can open more than 1 trade, like two trades with 25 pips stop loss. You can decide what you want.

This means you can open two micro lots where 1 pip move will give you $0.20 of profit or loss.

Larger starting capital gives you more room for your trades if they are not correctly predicted. This allows you to give the price more room to fluctuate.

Scenario 3

Starting capital in Forex account is $5,000 and you plan to risk 1% of your starting capital with micro lot size where 1 pip is equal to $0.10. Micro lot size is the minimum you can open so this will be the most conservative approach.

1% of $5,000 is $50.00

You need to have price changed by 500 pips because 1 pip is $0.10.

With this large account you are very flexible. You can open several orders with micro lot or you can open mini lot that will give you $1.00 per pip.

If you open 1 mini lot, 0.10, each pip move will give you $1.00 of profit or loss. When you set stop loss to $50 you can have 50 pip move until your stop loss is activated.

If you do not want to use 50 pips in one trade you can open two trades with 25 pips stop loss. When you sum those two trades you are still risking 1% of your starting capital.

Recommended Starting Capital in Forex

If you take a look into trading scenarios you can decide how much money do you need to start Forex trading. You should define what you can afford to invest as starting capital and what you can afford to lose.

The best is always not limit yourself in your trading. If you invest $100 you will be limited to 10 pips on each trade with micro lot. That is not enough space and you could end losing each trade very quickly.

Why?

If you trade highly volatile pairs like GBP/USD trading pair or GBP/JPY trading pair where they have pip change by several dozens in 1 hour, you will lose the money very fast.

The best would be to have $500 of starting capital in Forex account because you will have more room for each trade you open. You will have large enough stop loss which does not need to be hit very quickly. Meaning, the price can reverse and go in your direction where you will make profit.

One of the most important things you need to remember that you should invest, if possible, enough money where each trade will give you enough profit with which you will be satisfied.

If you are not satisfied with profit you will start to change something just to satisfy your needs and you will broke some rules which should not be broken.

For example, on the small starting capital like $100 where each trade will give you $2-3, maybe will not be enough for you and you will open more trades just to earn more. This will lead to over trading which will lead to destroying your account.

Demo Test

How much money do you need to start Forex trading should be defined when you trade on the demo account and where you learn all what is needed to trade with profit. You should have trading strategy defined and together with the risk management you can be very profitable.

If you enter on live account to test your strategy and to see how will you trade with your emotions then you should invest small as possible so you do not lose to much if your trades are not correct.

And, you should invest only what you can afford to lose.

Read more: How Long Demo Trade Before Going Live

The Problems With a Small Starting Capital in Forex

Here is a few points you can expect when you start with small capital in Forex. Each point will have some effect on you when you start trading.

Small Gains Are Frustrating

When you start trading and you start to pile up profitable trades you will eventually think that the amount you get is not large enough. You will think that you deserve more.

And you are right.

When you earn 1-3% on $100 large account, it makes you wonder how long will it take to earn $100 or $300. That sum of money would be great and you would be satisfied.

This way of thinking makes a pressure on you and it is a start of breaking the 1% risk rule. When you change that rule and you risk more than 1%, you will eventually see how your account balance is melting down due to large loses.

If you search on the web about profitable percentage on different account size you will find that large account size is more profitable than small one.

The reason is in the satisfaction. When you have large capital on the account you will be satisfied with small percentage gain.

A Small Balance Limits You

When you have small stop loss, like in the example where you have 10 pips stop loss, then you are very limited. You cannot leave that trade to be open for few days.

Mostly, that small amount of pips are used for day trading or scalping.

If you want to use larger stop loss with more pips, like 50, with 1% of risk you need to have larger account balance.

Your Cost-Per-Trade Is Higher When You Have a Small Balance

The cost of each trade you take is defined by the spread on the trading pair you are trading. If that trading pair is exotic trading pair then you will have spread from 5-20 pips.

And when you take this amount of pips in your 1% risk you will see that sometimes you cannot even open a trade because the spread eats all your necessary pips.

If you want to trade those pairs you need to have larger starting capital to sustain that spread and to open order with defined stop loss.

Starting Capital in Forex to Open Account

When you come to this point where you need to decide which account to open you need to consider all what is written before this line. By defining your wishes and possibilities you can decide which account you can open.

Account with starting capital in Forex can be open with a broker where broker defines what is the minimum you need to invest in order to open an account.

There are different types of accounts, like standard, mini, micro or nano. All of them have different requirements for a trader but mostly they are connected with the amount you can invest, spread they can offer and leverage you will use.

Each broker have defined his minimum he can allow you to invest. Some offers you to open account with $10, $50, $100 or $200 as a starting capital.

You can check the broker I am using on the GetKnowTrading broker page.

Conclusion

You need to define how much money do you need to start Forex trading based on the above stated. Use your trading strategy and risk management plan to determine what amount you can afford to lose and what amount will satisfy you in the long run.

In order to succeed with any starting capital in Forex you need to work hard. You need to change yourself if you are not profitable in order to become better.

Avoid losing more than 1-2% per each trade so you do not lose all your money. Pay attention on your emotions and try to avoid the desire to earn large sum of money in short time because it will destroy your account on the long run.

How much money do you need to start Forex trading will be defined by your goal, your broker, your trading strategy and your risk management plan.

Read more: Beginner Trading Mistake – Stop Doing in Order to Succeed in Forex


 

Frano Grgić

Frano Grgić

A Forex trader since 2009. I like to share my knowledge and I like to analyze the markets. My goal is to have a website which will be the first choice for traders and beginners.

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