Minimum capital to start forex trading

How Much Capital Should I Trade Forex With?

Summary: Research shows that the amount of capital in your trading account can affect your profitability. Traders with at least $5,000 of capital tend to utilize more conservative amounts of leverage. Traders should look to use an effective leverage of 10-to1 or less.

In looking at the trading records of tens of thousands of clients from a major FX broker, as well as talking with even more traders daily via live webinars, Twitter , and , it appears that traders enter the Forex market with a desire to cap their potential for losses on their risk based capital. Therefore, many newer traders choose to start trading forex with a small capital base.

What we have found out through the analysis of thousands of trading accounts is that traders with larger account balances tend to be profitable on a higher percentage of trades. We feel this is a result of the EFFECTIVE LEVERAGE used in the trading account.

Since many smaller traders are inexperienced in trading forex, they tend to expose their account to significantly higher levels of effective leverage. As a result, this increase in leverage can magnify losses in their trading account. Emotionally spent, traders then either give up on forex or choose to compound the issue by continuing to trade in relatively high amounts of effective leverage. This becomes a vicious cycle that damages the enthusiasm which attracted the trader to forex.

No matter how good or bad your strategy is, your decision (or non-decision, as the case may be) about effective leverage has direct and powerful effects on the outcomes of your trading. Last year, we published some tests showing the results over time of the same strategy with different leverage. You can read it in the article Forex Trading: Controlling Leverage and Margin .

In figure 2, we have modified 2 elements of the chart in figure 1. First, we renamed each column to represent the highest dollar value that qualified for the given column. For example, the $0-$999 equity range is now being represented as the $999 group. The $1,000 - $4,999 equity range is now being represented as the $4,999 group. And likewise, the $5,000 - $9,999 range is now being represented as the $9,999 group.

The second change made was that we calculated the average trade size of each group and divided it into the maximum possible account balance for that group. In essence, this provided us a conservative and understated effective leverage amount. (A larger balance reduces the effective leverage so the red line on the chart is the lowest and most conservative calculation of the chart.) For example, the average trade size for the $999 group was 26k. If we take the average trade size and divide it by the account equity, the result is the effective leverage used by that group on average.

As the effective leverage dropped significantly from the $999 group to the $4,999 group (red line), the resulting proportion of profitable accounts increased dramatically by 12 basis points (blue bars). Then, as further capital is added to the accounts such that they moved into the $9,999 category, the effective leverage continued to incrementally drop pushing the profitability ratio even higher to 37%.

Game Plan: How much effective leverage should I use?

We recommend trading with effective leverage of 10 to 1 or less. We don’t know when the market conditions will change causing our strategy to take on losses. Therefore, keep the effective leverage at conservative levels while using a stop loss on all trades. Here is a simple calculation to help you determine a target trade size based on your account equity.

Account Equity X Effective Leverage Target = Maximum Trade Size of All Combined Positions.

10 : 1 Leverage Calculations.

The above illustration shows a trader’s account size and the maximum trade size based on 10 to 1 leverage. That means if you have $10,000 in your account, then never have more than 100,000 of open trades at any one time.

The precise amount of leverage used is decided entirely by each individual trader. You may decide that you are more comfortable using an even lower effective leverage such as 5 to 1 or 3 to 1.

Most professional traders enter into trading opportunities focused on how much capital they stand to lose rather than how much capital they are looking to gain. Nobody knows the future movement of prices so professional traders are confident in their trading approach but conservative in their use of effective leverage.

Adjusting the effective leverage to suit your risk tolerance.

Our research indicates that accounts with the smallest capital base (the group labeled $999) have an average trade size of 26k for each trade. Their effective leverage is at least 26 times which is significantly higher than the 10 times leverage discussed earlier. If these traders want to trade at no more than a 10 to 1 effective leverage, they would need to make at least one of the adjustments noted below:

Increase their trading account equity by depositing more funds to an amount that reduces their effective leverage to less than 10 to 1. So our average trader, who is averaging 26k trade sizes, would need at least $2,600 in their account to trade 26k on a 10 to 1 effective leverage.

Decrease their trade size to a level that reduces their effective leverage to less than 10 to 1. Use the figure 3 calculations and chart above.

In the chart above, notice how the trade size remains relatively stable as the account equity increases from the $999 group to the $4,999 group. In essence, this indicates that traders are looking for, on average, at least $2.60 per pip (if they average 26k trade size, that is approximately $2.60 p/l per pip in most currency pairs).

There could be many reasons why traders average at least 26k for each trade, or $2.60 per pip. Perhaps they want a large enough trade size to make their time invested trading worthwhile. In other words, traders may be seeking a price per pip value and $2.60 is the minimum threshold on average. If these traders were to use no more than 10 to 1 effective leverage, they would need at least $2,600 in their account to support $2.60 per pip.

Another possibility is that many newer traders simply don’t understand the power of leverage and how one large losing trade can wipe out several winning trades in a row. Using a conservative amount of leverage will help slow down the rate of capital losses when a trader goes through a losing streak.

Regardless of the reasons, our goal is to use conservative amounts of leverage. If you know how much risk capital you have available, then use the chart and calculations used in Figure 3 to determine an trade size appropriate to your account size.

If you have a target “per pip” value, then use the calculations in figure 5 to determine the minimum amount of account capital needed to support your trade size. Increasing your capital base does not mean you will become more profitable. It means that you can stay in a trade longer if it goes against you. On average, traders that use a combination of sufficient capital (at least $5,000) and conservative use of effective leverage (10 to 1 or less) tend to be more profitable.

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What is the minimum capital required to start trading Forex.

In today forex faq, we have a question from one of our fellow reader from India.

I am Ashwath from India, I would like to know what is the minimum capital required to start fx trading and which is the best broker. Thanks in advance for your advice as i am very new in this field.

Glad to hear from you.

There is no say minimum capital to start trading forex as they are broker that allow you to start an account for $250USD. The amount you need to have in your account depends on how much you want to make every month.

If you aim to make $1,000 every month, a $250 account will not be able to make it. If you wish to make $1,000 every month and you have a strategy that grows your account for 25% per month, you will need to have $4,000 in your account.

Do not be mislead by those advertisement in the market telling you that they make $10,000 in a week. Those people had to have an account at least $100,000 in their account. There are too many gimmicks in this market nowadays and as a new trader, you have to be careful who to trust and what to believe.

Having a good broker is extremely important. I have a student who told me that he had $70,000 cheated by their broker.

Therefore if you ask me for recommend, I will only trust FXCM or Oanda as they are reputable big companies. Do not go for those small and weird broker that promises 100% or 200% bonus just to try to lure you in and you will later have a hard time withdrawing your money.

Lastly, please do not trade live without a proper proven strategy. Do remember to always trade a demo for at least 3 months and you will only move to live trading when you manage to produce 2 consecutive months of profitable trading with a strategy.

I understand that most of you new traders are very eager to get into action as I am once like you guys. I lost $20,000 within the first few months of trading thinking that I have a good strategy after watching some youtube videos.

Trust me, those strategies that you see on youtube are general strategies that are not fine tune and not back tested before.

If you have read my blog, you should have seen me writing a notice at the bottom of each strategy telling my readers that these are general strategies and you need to fine tune them before you use them in trading.

You can read about how to fine tune a strategy from my blog below.

The problem with most websites and youtube videos is that they do not tell you that those strategies are general and not fine tune yet. In fact, most but not all of the websites and videos in youtube are created by marketers and as a experienced trader, I can tell that what they shared are useless stuff.

However I can’t say that all of them are done by marketers as I believe that they are some that are created by real traders but again it is just a general strategy and not a fine tune one.

I hope that I have answered your question and do feel free to me whenever you have any problem.

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I will like to hear from you as a real and full time trader on the issue regarding good brokers to work with, which is the main stay of this forex trading business. Honestly i came across Markets and easyforex, though i liked their trading platform, pls are they good as fxcm as you mentioned earlier. Your advise would be highly appreciated.

Personally, the best I think for me is FXCM, Oanda and Markets.

Thanks for your for insight and recommendations.

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In this free e-book, I will walk you through the exact strategies I employ that you can implement yourself immediately.

How Much Money Do You Need to Start Forex Trading.

There are a dizzying array of variables to consider when you begin trading. Will you be a fundamental or technical trader? Perhaps, a combination of both?

Also, will you trade short term or long term? Will you trade rigidly based on a the rules of a system? Will you take a more discretionary approach?

The questions are endless – and together, they determine what you achieve in the market. But you can also break them down into even more specific directions.

First of all, how much money do you need to start Forex trading? Also, how large should you make each trade?

The answer may be smaller than you think – it's zero.

A demo trading account allows you to experience the live Forex market without risking any money. This even applies if you want to start playing around with an expert dealing platform like MT4 Supreme Edition.

If you are a novice, a demo account is the ideal way to dip your toes in the water. After all, part of learning is making mistakes – but you don't have to lose capital doing so.

The Forex Market: a Place for Large and Small.

Let's consider the Forex market for a moment.

Much is made of the vast size of the FX market, but its egalitarian accessibility is often overlooked. Small players happily play alongside the largest participants.

There is a place at the table for everyone because of the surprisingly low barriers to entry.

High levels of leverage allow small deposits to command sizable positions.

In short, this means you can make trades without tying up a lot of your cash. Obviously, you should never trade beyond your means, but leverage offers a very convenient way of trading.

How much money do I need to open a Forex account?

It depends on the type of account. Because different account types offer a variety of services and generally require different starting sums. But for the most part, you can open an account with a small deposit.

For example, to open the popular Admiral. Markets account, you need a minimum deposit of 200 EUR (or similar sizes in other currencies). This account offers low spreads and highly competitive leverage. Once you have built up your confidence, you might want to open the Admiral. Prime account with a minimum deposit of 1000 EUR.

This account offers institutional-grade speed of execution with ultra-low spreads and is well suited for high frequency traders. The point is, the account specs will almost certainly answer your deposit question.

Be risk-aware.

From a position-sizing standpoint, don't trade more than you can afford to lose. When considering how much to start Forex trading with, it is very much an issue of your own personal finances and your own attitude to risk.

Trading can often be a nerve-wracking and pressure-filled experience. One simple way to ease this is to trade conservatively. This will help you cope with adverse conditions.

Let's look at an example to get a feel for how much we are talking about.

A sensible rule of thumb is that you shouldn't be risking more than 1% or 2% of your risk capital per trade. For the sake of convenience, let's use 1%.

The minimum trade size with an Admiral. Markets account is 0.01 lots. A lot is a standard transaction size for each currency pair. Let's say you decide to buy 0.01 lots of EUR/USD.

This is a position that means you make or lose 0.1 USD for every pip movement. The margin for a position this small would be covered by your minimum deposit.

Here's the kicker – quantifying the risk attached to an individual trade is a tricky business. We can broadly say that the risk is the amount of loss you would be willing to withstand before closing the position.

However, this likely underestimates the risk because you may subsequently change your mind and tolerate a greater loss. There may also be times when a market moves faster than you can react.

One way to try to draw a line under the position and quantify the risk is to use a stop-loss.

But be aware that a conventional stop order is not guaranteed. A stop order becomes an order to deal at market once its level has been hit. In the event of a fast-moving or gapping market, this means it may be subject to slippage. Slippage is the number of points that your position is filled away from the level of your stop order.

You can read more about stops in our risk management section and learn about how our Volatility Protection service keeps you safe from volatility risks.

In short, stops do not mean any maximum loss is set in stone, but they do give you a rough and useful idea of your risk for normal conditions.

Let's say you placed your stop 80 pips away. For our rough estimation, we could say the theoretical risk is 80 pips x 0.1 USD per pip = $8.

If we are assigning a theoretical risk of $8 to this trade and we are also saying one trade is 1% of our total risk capital, then the total risk capital must be $8 x 100 = $800. Because the minimum transaction sizes are so small, you only need a small amount to start trading Forex.

These are just some sample numbers, of course. If you worked with tighter stops, your risk capital would be even smaller. If you worked with wider stops and/or a larger transaction size, you would need more risk capital.

Here's another way of considering the question – successful trading is about winning in the long run . To win in the long run, you must not be wiped out in the short run.

Still want to know how much money you need for Forex trading? Put it simply, you need enough to avoid blowing up.

Look at price catastrophes that have occurred historically in your currency pair of choice. Think about what such movements would mean to you with your average trading size. Make sure that your risk capital is large enough to withstand such price shocks.

Once you're up and running, and in a position to make steady returns, it might be time to consider how much money you need to trade Forex full-time.

If you are looking to know realistic monthly returns for a trader, you are going to be trading in sizes that are much larger than our minimums. Therefore, your risk capital will have to be larger as well.

Final Thoughts.

If you start conservatively and use sensible money management, you do not need a large amount of money to trade Forex. It is possible to start trading with only a few hundred Euros, provided your trading sizes are small.

If you are willing to put in the preparatory leg work, you should be able to discover a trading approach that works for you. There's one more thing to consider – people who succeed at trading, work hard at it. The more effort you put in, the more likely you are to succeed.

So, when facing a new, challenging venture, the only correct option is to learn more about what you are getting into.

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Risk warning: Trading Forex (foreign exchange) or CFDs (contracts for difference) on margin carries a high level of risk and may not be suitable for all investors. There is a possibility that you may sustain a loss equal to or greater than your entire investment. Therefore, you should not invest or risk money that you cannot afford to lose. Before using Admiral Markets UK Ltd or Admiral Markets AS’ services, please acknowledge all of the risks associated with trading.

The content of this website must not be construed as personal advice. We recommend that you seek advice from an independent financial advisor.

All references on this site to ‘Admiral Markets’ refer jointly to Admiral Markets UK Ltd and Admiral Markets AS. Admiral Markets’ investment firms are fully owned by Admiral Markets Group AS.

Admiral Markets UK Ltd is registered in England and Wales under Companies House – registration number 08171762. Admiral Markets UK Ltd is authorised and regulated by the Financial Conduct Authority (FCA) – registration number 595450. The registered office for Admiral Markets UK Ltd is: 16 St. Clare Street, London, EC3N 1LQ, United Kingdom.

Admiral Markets AS is registered in Estonia – commercial registry number 10932555. Admiral Markets AS is authorised and regulated by the Estonian Financial Supervision Authority (EFSA) – activity license number 4.1-1/46. The registered office for Admiral Markets AS is: Ahtri 6A, 10151 Tallinn, Estonia.

How Much Trading Capital Do Forex Traders Need?

Access to leverage accounts, easy access to global brokers and the proliferation of trading systems promising riches are all promoting forex trading for the masses. However, it is important to keep in mind that the amount of capital traders have at their disposal will greatly affect their ability to make a living from trading. In fact, capital's role in trading is so important that even a slight edge can provide great returns. This is because an edge can be exploited for large monetary gains only through large enough positions and replication (or frequency). A trader's ability to implement size and replication when conditions are right is what separates a true professional from less-skilled traders. This is accomplished by - among many other things - not being undercapitalized.

So just how much capital is required? Find out how much income you need to meet your trading goals - and whether ultimately, your goals are realistic. (For more, check out Day Trading Strategies For Beginners .)

What Is Respectable Performance?

Every trader dreams of taking a small amount of capital and becoming a millionaire off of it. The reality is that it is unlikely to occur by trading a small account. While profits can accumulate and compound over time, traders with small accounts often feel pressured to use large amounts of leverage or take on excessive risk in order to build up their accounts quickly. Not realizing that professional fund managers often make less than 10-15% per year, traders with small accounts often assume they can make double, triple or even 10 times their money in a single year.

The reality is, when fees, commissions and/or spreads are factored in, a trader must exhibit skill just to break even. Take for example an S&P E-mini contract. Let's assume fees of $5 per round trip trading one contract and that a trader makes 10 round trip trades per day. In a month with 21 trading days this trader will have spent $1,050 on commissions alone, not to mention other fees such as internet, entitlements, charting or any other fees a trader may incur in the course of trading. If the trader started with a $50,000 account, in this example, he would have lost 2% of that balance in commissions alone.

If we assume that at least half the trades crossed the bid or offer and/or factoring slippage, 105 of the trades will put the trader offside $12.50 immediately. That is an additional $1,312.50 cost for entering trades. Thus, our trader is now in the hole $2,362.50 (close to 5% of his initial balance). This amount will have to be recouped through the profits on the investment before the investor can even start making money!

A Realistic Look at Fees.

When fees are looked at in this way, just being profitable is admirable. But if an edge can found, those fees can be covered and a profit realized. Assuming that a trader can establish a one-tick edge, meaning on average they make only a one-tick profit per round trip, that trader will make:

210 trades x $12.50 = $2,625.

Minus the $5 commissions the trader comes out ahead by:

$2625 - 1050 = $1,575, or a 3% return on the account per month.

The average profit shows that while the trader has winning and losing trades, when the trades are averaged out the resulting profit is one tick or higher.

Making an average of one tick per trade erases fees, covers slippage and produces a profit that would beat most benchmarks. Despite this, a one tick average profit is often scoffed at by novice traders who shoot for the stars and end up with nothing. (To learn more, see Price Shading In The Forex Markets .)

Are You Undercapitalized for Making a Living?

Making only one tick on average seems easy, but the high failure rate among traders shows that it is not. Otherwise, a trader could simply increase the trade size to five lots per trade and be making 15% per month on a $50,000 account. Unfortunately, a small account is significantly impacted by the commissions and potential costs mentioned in the section above. A larger account is not as significantly affected. The larger account also has the advantage of taking larger positions to magnify the benefits of day trading . A small account cannot make such big trades, and even taking on a larger position than the account can withstand is very risky because this could lead to margin calls.

Because one of the common goals among day traders is to make a living off their activities, trading one contract 10 times per day while averaging a one-tick profit (which as we saw is a very high rate of return) may provide an income but factoring other expenses, it is unlikely that income will be one on which a trader could survive.

An account that is able to trade five contracts can essentially make five times as much as the trader trading one contract, as long as a disproportionate amount of capital is not risked.

There are no set rules on how many trades to make or contracts to trade. Each trader must look at his or her average profit per contract/trade to understand how many trades or contracts are needed to meet a given income expectation. How much risk a trader exposes himself to in doing this is also of prime concern. (For more insight, read Understanding Forex Risk Management .)

Leverage offers high reward coupled with high risk. Unfortunately, since many traders do not manage their accounts correctly, the benefits of leverage are rarely seen. Leverage allows the trader to take on larger positions than they could with their own capital alone.

Since traders should not risk more than 1% of their own money on a given trade, leverage can magnify returns, as long as the 1% rule is adhered to. However, leverage is often used recklessly by traders who are undercapitalized to begin with. In no place is this more prevalent than in the foreign exchange market, where traders can be leveraged by 50 to 400 times their invested capital. (Learn more about this in Forex Leverage: A Double-Edged Sword and Adding Leverage To Your Forex Trading .)

A trader who deposits $1,000 can use $100,000 (with 100 to 1 leverage) in the market. This can greatly magnify returns and losses. This is fine as long as only 1% (or less) of the trader's capital is risked on each trade. This means with an account this size only $10 (1% of $1,000) should be risked on each trade. In the volatile forex market, most traders will be continually stopped out with a stop so small. Therefore, in this market traders can trade micro lots, which will allow them more flexibility even with only a $10 stop. The lure of these products is to increase the stop, yet this will likely result in lackluster results as any trading system can go through a series of consecutive losing trades.

In this example, traders need to avoid the temptation of trying to turn their $1,000 into $2,000 quickly. It may happen, but in the long run the trader is better off building the account slowly by properly managing risk.

With an average five-pip profit and making 10 trades per day with a micro lot ($1,000), the trader will make $5 (estimated, and will depend on currency pair traded). This does not seem significant in monetary terms, but it is a 0.5% return on the $1,000 account in a single day. As the account grows the trader may be able to make a living off the account, but attempting to make a living off a small account will likely result in increased risks, excessive use of leverage and often large losses. (For more, see Forex Leverage: A Double-Edged Sword .)

Traders often fail to realize that even a slight edge such as averaging a one-tick profit in the futures market, or a small average pip profit in the forex market can mean substantial percentage returns. Most traders enter the market undercapitalized, which means they take on excessive risk by not adhering to the 1% rule. Leverage can provide a trader with a way to participate in a otherwise high capital requirement market, yet the 1% rule must still be used in relation to the trader's personal capital. Profits will come as the account grows, and making a living only requires a small edge, but the account must be large enough to provide monetary returns the trader can live off of. The edge is exploited by repeatedly putting enough capital into play (without excessive risk) to turn the edge into a livable income. (For a step-by-step look at how to get started in forex, check out our Forex Walkthrough .)