What is the minimum amount required to start forex trading

It’s easy to start day trading currencies, because the foreign exchange (forex) market is one of the most accessible financial markets. Some forex brokers require a minimum initial deposit of only $50 to open an account, while others allow you to open accounts with no initial deposit.

It is possible to take a set amount of capital and begin trading. However, there are several factors to consider when determining how much you need in order to start day trading on the forex market.

Key Takeaways

  • Successful forex day trading requires that you accurately predict price changes.
  • You can start day trading forex for as little as $100, but that amount will limit your returns.
  • It’s generally recommended that you use no more than 1% of your account balance on a forex trade.
  • Always enter a stop-loss order to prevent significant losses if the base currency moves in the opposite direction from what you think it will do.

Minimum Capital for Day Trading Forex

If you must start trading right away, you can begin with $100. For a little more flexibility, $500 can lead to slightly more income or returns. However, $5,000 might be best, because it can help you produce a reasonable amount of income that will compensate you for the time you’re spending on trading.

Set amounts don’t help you understand the minimum amount required for your trading desires, life circumstances, or risk tolerance. You should understand the risks involved in trading forex and know how to mitigate them.

Note

The minimum capital you need to start trading is how much you can afford to trade with.

It’s also important to know how forex trades are made and what they consist of, so that you can better gauge your ability to withstand losses on your way to making gains.

Understand the Risks

Since day trading is about trading on price changes, most of the risk is in the form of prices not moving the way you thought they might go. That happens often, so day traders shouldn’t risk more than 1% of their forex account on a single trade.

Trading Risks

Leveraged trading and marginal trading occur when you use forms of debt to fund your trades. Both of these activities significantly increase the amount of risk you take on, and they increase the likelihood of owing much more than you did initially.

Trade risk, regarding the money you risk in one trade and not the risks mentioned previously, is the amount of capital you could lose. It is determined by finding the difference between your entry price and the price at which your stop-loss order goes into effect, multiplied by the position size and the pip value (discussed below).

Risk Management

While you can use leverage to fund your trades and be successful, the risks are so high that the best way to manage the risks involved is not to use leverage-based trading.

The 1% rule is one of the best methods for mitigating trade risk. If your account contains $1,000, then the most you’ll want to risk on a trade is $10. If your account has $10,000, you shouldn’t risk more than $100 per trade.

Note

Even great traders have strings of losses; if you minimize the risk on each trade, a losing streak won’t significantly deplete your capital.

Learn Lot Sizes and Pip Values

When you buy or sell forex, prices move in “pips,” and the amounts are sold in lots. The relationship between the two is important for establishing your minimum amount.

Lots

Forex pairs trade in units of 1,000 (micro), 10,000 (mini), or 100,000 (standard) lots. When USD is listed second in the pair—such as EUR/USD—and you fund your account with U.S. dollars (USD), the value of the pip per type of lot is fixed in USD.

If you hold a micro lot of 1,000 units, each pip movement is worth $0.10. If you hold a mini lot of 10,000, then each pip move is $1. If you hold a standard lot of 100,000, then each pip move is $10.

Pips

The forex market moves in pips, which stands for “percentage in point or price interest point.” A pip is the smallest amount that a currency can change. For instance, in most currency pairs, a pip is 0.0001, which is equivalent to 1/100th of a percent.

If the EUR/USD price changes from 1.3025 to 1.3026, that’s a one-pip move. If it changes to 1.3125, that’s a 100-pip move.

Note

Loss or gain from pip movement is calculated by multiplying the pip value by how many pips a currency moves by.

One exception to the pip value “rule” is the Japanese yen. A pip for currency pairs in which the yen is the second currency—called the “quote currency”—is 0.01, equivalent to 1%.

Create Stop-Loss Orders

When trading currencies, it’s essential to enter a stop-loss order. Stop-loss orders automatically prevent significant losses if the base currency moves in the opposite direction of your bet. A simple stop-loss order could be 10 pips below the current price when you expect the price to rise, or 10 pips above the current price when you expect it to fall.

This method depends upon the amount you’ve limited yourself to trade with. A stop loss of 10 pips below could be a significant amount of money—if one EUR/USD pip costs $10, a 10-pip move downward could cost you $100 on one standard lot.

Determine Your Minimum Capital for Trading

It helps to see how different trading amounts can influence your minimum amount for day trading. The previous examples of $100, $500, and $5,000 are excellent for seeing the differences and working through the calculations to find your limit.

$100 in the Account 

Suppose you open an account for $100. You will want to limit your risk on each trade to $1 (1% of $100).

Trade Risk

If you place a trade in EUR/USD, buying or selling one micro lot, your stop-loss order must be within 10 pips of your entry price. Since each pip is worth $0.10, if your stop loss were 11 pips away, your risk would be $1.10 (11 x $0.10 x 1), which is more risk than your strategy allows for.

$500 in the Account

Now suppose you were to open an account with $500. You can risk up to $5 per trade and buy multiple lots. For example, you can set a stop-loss 10 pips away from your entry price and buy five micro-lots. You’d still be within your risk limit, because 10 pips x $0.10 x 5 micro lots = $5.

If you were to choose to place a stop-loss 25 pips away from the entry price, you could buy two micro-lots to keep the risk on the trade below 1% of the account. You would buy only two micro-lots, because 25 pips x $0.10 x 2 micro lots = $5.

Starting with $500 will provide greater trading flexibility and produce more daily income than $100, but most day traders will still be able to make only $5 to $15 per day off that amount with any regularity.

$5,000 in the Account

If you were to start with $5,000, you have even more flexibility and can trade mini-lots as well as micro-lots. If you buy the EUR/USD at 1.3025 and place a stop loss at 1.3017 (eight pips of risk), you could buy six mini-lots and two micro-lots.

Your maximum risk would be $50 (1% of $5,000), and you could trade in mini lots, because each pip is worth $1, and you would have chosen an eight-pip stop-loss. Divide the risk ($50) by (8 pips x $1) to get 6.25 for the number of mini-lots you could buy without exceeding your risk. You would break up 6.25 mini-lots into six mini-lots (6 x $1 x 8 pips = $48) and 2 micro-lots (2 x $0.10 x 8 pips = $1.60), which would put a total of only $49.60 at risk.

With this amount of capital and the ability to risk $50 on each trade, the income potential moves up, and traders can potentially make $50 or more per day, depending on their forex strategy and price changes.

Frequently Asked Questions (FAQs)

How many hours of trading do you need to do in a day to make money in forex markets?

Some day traders may only spend a couple of hours actually trading forex, while others will spend four or more hours. However, that doesn’t include time spent researching, reviewing trades, and establishing trade plans.

How much trading volume does forex do in a day?

More than $6 trillion changes hands every day on the forex market. That’s a total across all currencies, not just the U.S. dollar.

Which is better for day trading, stocks or forex?

Every trader needs to find their own “edge,” a special focus that gives them a leg up over other traders. The only way to tell whether you have a better edge in stocks or forex is to try them both. Some barriers to stock day trading could make forex day trading more accessible to traders, such as the pattern day trading minimum equity requirement, but that doesn’t make one market “better” than the other.

With most brokers offering accounts with as little as $500 initial investment, and some going as low as $100, it’s easy to sign-up and get started in Forex with almost any budget.

But is the minimum really enough to trade effectively?

As you’ll see, it’s more complicated than a simple yes/no answer. The minimum amount you need will depend partly on your trading style, your broker, and whether you intend to use any profits as a side-income (or main income).

Putting Risk Management Before Quick Profits

Regardless of what your analysis and instincts tell you, there’s no sure thing in trading; even the most profitable traders have runs where every decision they make is wrong. Your first objective when depositing should be to have a large enough balance that an unfortunate losing run doesn’t leave you broke.

Of course, if you aren’t a profitable trader, no amount of risk management will prevent your budget from drying-up eventually. Risk management measures are there to reduce the chances that a profitable trader will take damaging losses due to an unusual losing streak.

Ideally, you should not risk more than 1% of your balance in a trade. This rule means your starting balance should be at least 100 times greater than your maximum risk in the trades you’re making.

Pips, Lots, and Risk

The Forex market moves up and down in pips (price interest points), which are calculated using the last decimal point in the exchange rate. Most (but not all) currency pairs are priced to four decimal points. For example, if the GBP/USD is priced at 1.3435 and moves to 1.3437, it’s moved two pips. If it then goes to 1.3537, that’s a 100-pip move.

Forex enables you to trade currency pairs in 1000, 10,000 and 100,000 units, which are called micro, mini, and standard lots respectively. Users with smaller starting capitals will normally be trading micro lots.

In pairings where the USD is listed second, a pip is always worth $0.0001. So, when you trade micro lots of 1000 units, one pip of movement will gain or lose you $0.10 (found by multiplying pip cost by the number of units). In other pairings, the value of the pip will depend upon the second currency listed.

Assuming you trade just one micro lot and set a stop loss of 10 pips, you could conceivably trade with $100 without breaking the 1% rule, because 1000 units x 10 pips x $0.0001 = $1.

Although you could start with $100, we wouldn’t recommend it, because having a very small account puts you at a significant disadvantage.

The Problems With Starting With a Small Account

There are three problems when starting with a very small account size:

1. Insignificant Gains Are Frustrating

When your hard work and good decision-making result in gains of just a dollar or two, you might be left thinking about what would have happened if you had been able to trade more units. Many beginners feel this frustration, particularly when they start to have a bit of success – it’s easy to think ‘if only I’d taken a bigger risk.’

That thought process is just one step away from breaking the 1% rule. Once you’ve done that, your balance is at significant risk (no matter how good your decisions are). Traders who are keen to use their profit as a side income are particularly prone to making this mistake because they put pressure on themselves to start making larger profits immediately.

2. A Small Balance Limits You To Day Trading

A stop-loss of 10 pips is ok for day trading, but what if you want to use a different strategy? Some traders prefer swing trading, which is when you hold your position for a few days or even a couple of weeks to gain from longer-term movements.

This style of trading requires a higher stop-loss, often at least 20 to 50 pips. To hold these positions without using more than 1% of your account will require a starting balance of $2,500+.

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

Most brokers charge users with larger accounts less per trade, which means that those starting with a very small account pay the highest fees (as a percentage of their trades). The wider the spread, the harder it is to make a profit – which makes it even harder for beginner traders to make their first profits.

The Recommended Minimum For Start Forex Trading

Considering all of the above, a good starting budget for day-trading is $1000, although $500 will do. Never deposit what you cannot afford to lose (and replace) – it’s unlikely you’ll hit on a winning strategy immediately. This starting balance should be increased to at least $2500 if you want to swing-trade instead of day-trade.

Another good option is to open a free demo account and try out different strategies for no cost at all. This method allows you to get some experience before you put your money on the line – and you’ll be that much more likely to succeed when you do then start trading forex for real money later on.

Written by Jane