How to Determine the Minimum Capital to Start Day Trading Forex
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 to start day trading on the forex market.
- Successful Forex day trading requires that you accurately predict stock price changes.
- You can start day trading Forex for as little as $100, but this 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.
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 give 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.
But set amounts don't help you understand the minimum amount required for your trading desires, life circumstances or risk tolerances. You should understand the risks that are involved in trading forex and know how to mitigate them.
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 stock price changes, most of the risk taken on is in the form of prices not moving the way you thought they might go. This happens often, so day traders shouldn't risk more than 1% of their forex account on a single trade.
Leveraged trading and marginal trading are when you use forms of debt to fund your trades. Both increase the amount of risk you take significantly and 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.
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.
Even great traders have strings of losses; if you keep the risk on each trade small, 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.
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.
The forex market moves in pips, which stands for percentage in point or price interest point. A pip is the smallest amount a currency can change. For instance, in most currency pairs, a pip is 0.0001. This 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.
Loss or gain from pip movement is calculated by multiplying the pip value by how pips a currency moved.
An 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 the price 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 movement down 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
Assume you open an account for $100. You will want to limit your risk on each trade to $1 (1% of $100).
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 assume you 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.
Or, if you choose to place a stop loss 25 pips away from the entry price, you can 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 this amount with any regularity.
$5,000 in the Account
If you 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 is $50 (1% of $5,000), and you can trade in mini lots because each pip is worth $1, and you've 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 puts 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.