How Much Trading Capital Do Forex Traders Need?
Are you anticipating to open a live Forex trading account? If so, you require initial capital. Capital in this case refers to the amount of funds that the traders is willing to set aside (deposit into his trading account for the purposes of trading). Forex is one of the financial investments where the investor or trader doesn’t necessarily require too much funds to begin with. Nevertheless, even though you don’t require too much cash for you to start trading, having too little in your account actually adds to the risks of Forex trading . The smaller your trading capital, the more the risk your money is at. A small account can easily be wiped clean especially when the market makes some unpredicted and unexpected movements – particularly during economic news releases.
There are various factors that affect the amount of capital that a trader requires. These factors include:
- The broker
- The type of trading account
- The leverage
- The amount of lot size that the trader is planning to use to open positions
- The trading strategy that the trader is intending to use
The forex financial market has different brokers that offer trading platforms for individual traders. Each broker has their terms of operation that the trader ought to agree to before opening any account with them. There are some traders that will allow as little as five dollars of capital. However, it should be the work of the trader to check and see that the amount of capital that he or she is investing is safe. It is not always that having a minimum amount of capital is the best option. Too small an amount of capital may lead to losing all of the initial capital.
Actually the minimum amount of capital that the brokers indicate should only be used to help you open an account. Then after you have a validated trading account, you should seek to have a substantial amount of capital in your trading account so as to reduce the risk of getting a margin call. This amount will depend on the type of forex account that you are interested to open.
The type of trading account
The kind of account that you hold will significantly influence the amount of capital that you ought to have. The difference in the type accounts is how much each lot is worth. In a micro account, if you use 0.01 lot size and the market prices moves by 100 points (10 pips), that will be equivalent to 0.1 units of the type of currency that you are using in your account. If you use US Dollars it will be 10c per pip movement. The minimum capital for this type of account is $5. However to be safe, you should have at least $50 for you to trade comfortably without the risk of a margin call.
On the other hand, if you had a standard account , if you open a position using 0.1 lot size and the market moves by 100 points (10 pips), it will be equivalent to 1 unit of your account base currency (currency that you use for your account). This means that if your account is in US Dollars, it will be $1. In most cases the minimum amount of capital for the standard accounts is usually $ 500. However, you will meet some brokers that will require you to have a higher initial deposit when opening your account. But for your own safety, you should at least ensure that you have $ 1,000 in your account.
If you decide to open an executive account the pip value calculation will be equivalent to that of the standard. The difference comes in the initial capital required and the leverage. For most of the executive accounts the minimum is usually $ 5,000. However there are some brokers especially ECN brokers that have mini and standard accounts while others have standard, and executive accounts only.
What is leverage? In simple terms, leverage allows the traders to open trades that are worth more than the actual amount of money in their accounts. So, the traders “borrows” some amount of money from the broker. The higher the amount of leverage, the more the trader can open more trades or trades of larger lots with lesser amount of capital. Therefore if you decide to use a small leverage, you have to have a substantial amount of capital. The maximum amount of leverage varies from broker to broker and across the different accounts that the brokers offer.
There are some brokers that offer leverage ratios from as high as 1000:1, down to as little as 1:1 (no leverage). The higher the leverage, the lower the margin required for every transaction. For example with a leverage of 50:1, every transaction requires 2% margin of the total value. This goes to show that you have to have a substantial amount of capital; in your account. But if you used a leverage of 1000:1, you would require 0.1% margin of the total value. Thus you can trade with even lesser amount of capital. The margin will be the multiplication of the volume and lot size (micro or standard) divided by the leverage.
The amount of lots that the trader is planning to be using to open any position.
The lot size directly affects the free margin. With a micro lot size the amount on lots used translate to a very small used margin. On the other hand with a mini or standard lot sizes, the used margin is relatively high. The lot size is dependent on the type of account that you open. The micro lot size is used for the micro accounts while the standard lot size is used for the standard accounts and the mini lot size is for the mini accounts.
The trading strategy that the trader is intending to use.
The trading strategy is also a crucial aspect when looking into the amount of capital that that a trader should have. For a scalper, a minimum of $10,000 trading capital might be necessary so that each trade is opened with a relatively larger lot volume and hence better returns as compared to if the capital was less at let’s say $100 which would cause the trader to open trades with lesser lot volumes and hence lesser returns.
Also if you trading strategy require there to be too many trades at a time, you will require a larger amount of capital so as to cater for the required margin to open all those trades. If you open too many trades at a time without considering the amount of free capital you will end up with a very small amount of available margin, which will mean there will be very high chances of receiving a margin call.
So what is the right amount of capital?
For intraday traders, it might be recommended to at least have an initial capital of $2,500. For the scalpers a minimum of $10,000. For long term traders, they should have at least $20,000 also so as to sustain the trade for a longer time in the market while still aiming at their target levels. However, this doesn’t mean that if you don’t have this amount of capital you can’t trade. No. You can still trade but you will be putting your capital which you have saved for some time at a great risk. It is always good to wait until you have the right amount of capital required.
Depending on the amount of leverage, lot size, the lot volume and the number of open trades at a time the traders can be in a good position to know exactly how much capital he or she should have.
The amount of Capital = Number of trades ((Lot Size × Lot Volume)/ Leverage)
For example with a leverage of 50:1, micro lot size, a lot volume of 10 and necessity of 5 trades at a time, the trader will require approximately $ 20,000 at any instance of trading. And to be safe, the trader should at least have 200% of the amount that is required for every trading so as to take into consideration the spread and other market factors like retracements. If any of the above is changed the required amount of capital will be greatly affected. For example if the leverage is increased to 400:1, the trader will require approximately $2,500.