The forex market is the most accessible financial market in the world. You can start trading with an initial investment as low as $50. However, the amount of money you start with is a significant determinant of your ultimate success and will influence your trading experience and just because you can start trading with $50 doesn’t mean that you should.
The minimum amount of money you start with should correlate with your goals. Do you want to make a regular income with forex trading? Do you simply want to grow your small account regardless of how long it takes?
To determine how much money, you need to start trading forex, you have to consider your level of risk and the potential risks and rewards of different investment amounts.
The general hard and fast rule is that you shouldn’t risk more than 1% of your capital on a single trade. This puts a risk-based limit on your trade size depending on how much you have in your account. For example, if your forex trading account has $50, you shouldn’t risk more than $0.50 per trade and if you have $10,000, your maximum risk per trade is $100.
Trading with a small account means you don’t have a lot of funds at your disposal. Even experienced professional traders sometimes have strings of losses and with a small account, you don’t have a big buffer against any unexpected losses or mistakes.
Every forex trader needs to follow sound risk management rules, but with a small account, you have to be more vigilant about managing risk. You have to be especially watchful of your position size and risk/reward ratio and you should use stop-loss orders to cut your losses.
Risk Management Using Stop-loss Orders
Stop-loss orders are an important element of risk management because the market sometimes moves faster than you can react and the order can mitigate risk when the market moves against your position.
Stop orders help you quantify risk. For instance, let’s say you place a trade in EUR/USD. With a micro lot of 1,000 units, each pip is worth $0.10 and if you place your stop 50 pips away, your theoretical risk will be $5 (50pips x $0.1 per pip).
If you assign this theoretical risk of $5 to a trade and you are only risking 1% of your capital on the trade, your total risk capital is $500.
If you worked with a tighter stop, for example, 20 pips, your risk capital will be even smaller. Using the example above, with a stop-loss 20 pips away, your total risk capital would be $200. Conversely, if you work with wider stops, you will need more risk capital. A stop-loss 100 pips away will require $1,000 capital.
Generally, wider stop-losses tend to lead to trading success faster than tighter stop losses and so your capital investment will depend on your trading goals.