The Minimum Capital Required to Start Day Trading Forex
Want to start day trading forex? Thankfully the (foreign exchange) forex market is the most accessible financial market, only requiring a small amount of capital to open an account. But, just because forex brokers only require a small initial deposit doesn't mean that is the recommended minimum. Based on your goals and trading style here's how much capital you need to start day trading forex.
Risk Management and Forex Day Trading Requirements
Day traders shouldn't risk more than 1% of their account on a single trade. If your forex day trading account is $1,000, then the most you'll want to risk on a trade is $10. If your account is $10,000, risk $100 per trade. Even great traders have strings of losses; by keeping the risk on each trade small, even a losing streak won't significantly deplete capital. Risk is determined by the difference between your entry price and the price of your stop-loss order, multiplied by the position size and the pip value (discussed in the scenarios below).
Minimum Capital Required to Start Day Trading Forex
Unlike the stock market, there is no legal minimum you need to start day trading forex. Therefore, you can begin trading with significantly less capital than the $25,000 required for day trading US stocks.
The forex market moves in pips. The EUR/USD may be priced at 1.3025, and the fourth decimal place represents one pip of movement. If the EUR/USD moves to 1.3026 that is a one pip move, if it moves up to 1.3125, that is a 100 pip move.
Forex pairs trade in 1000, 10,000 and 100,000 units, called micro, mini and standard lots. When starting out in forex day trading it's recommended traders open a micro lot account. Trading micro lots allows for more flexibility so risk remains below 1% of the account on each trade. For example, a micro-lot trader can buy $6,000 worth of currency, or $14,000, or $238,000 but if they open a mini lot account they can only trade in increments of $10,000, so $10,000, $20,000, etc. If trading standard lots, a trader can only take positions of $100,000, $200,000, etc.
When the USD is listed second in the pair, as in the EUR/USD or AUD/USD, the value of the pip is fixed. If you hold a 1000 micro lot, each pip movement is worth $0.10. If you hold a 10,000 mini lot then each pip is worth $1. If you hold a 100,000 standard lot then each pip move is worth $10. Pip values can vary by price and pair, so knowing the pip value of the pair you're trading is critical in determining position size and risk.
Capital Scenarios for Forex Day Trading
Assume you open an account for $100 (the minimum initial deposit most forex brokers accept). Your risk on each trade is therefore limited to $1 per trade (1% of $100).
If you place a trade in the 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 order is 11 pips away, your risk is 11 x $0.10 = $1.10, which is more risk than you're allowed. Therefore, opening an account with $100 severely limits how you can trade and is not recommended. Also, if you are risking a very small dollar amount on each trade, by extension you aren't going to make very much money. Depositing $100 and hoping to draw an income just isn't going to happen.
To make bigger gains will require more capital.
Assume you open an account for $500 (opening an account with at least $500 is recommended). With $500 you can risk up to $5 per trade. This provides more flexibility. You can set a stop loss 10 pips away from your entry price, and take five micro lots (because 10 pips x $0.10 x 5 micro lot = $5 risk).
Or, if it is more logical to place a stop loss 25 pips away from the entry price, then take only two micro lots to keep the risk on the trade below 1% of the account. You can take two micro lots because 25 pips x $0.10 x 2 micro lots = $5, and $5 is the maximum we can risk on a $500 account.
Starting with $500 will produce more daily income than starting with $100, but most day traders will still only be able to make $5 to $15 per day off this amount (with regularity). If you start with $5000 you have even more flexibility and can even day trade forex with mini and standard lots (as well as micro lots). If you buy the EUR/USD at 1.3025 and place a stop loss at 1.3017 (8 pips of risk) what position size do you take?
Your maximum risk allowed on the trade is $50 (1% of $5,000), and we can trade in mini lots because each pip is worth $1 and we only have an 8 pip stop. $50 divided by (8 pips x $1) = $50 / $8 = 6.25 mini lots, or 6 mini lots and a 2 micro lots, which is equivalent to $62,000.
With this amount of capital, and being able to risk $50, the income potential moves up and traders can potentially make $50 to $150 per day, or more, depending on their forex strategy. Leverage allows forex traders to take a position worth $62,000, while only having a $5,000 account. As long as risk is controlled on each trade, leverage is a significant advantage in forex trading.
Forex Day Trading - Recommended Capital
Starting with $500 gives some flexibility in how you can trade; $100 doesn't. If you want to day trade forex, start with at least $500. No matter what balance you start with, limit risk to 1% of your account balance on each trade. Alter the above scenarios to help determine what your position size should be based on the stop loss level you use and what type of lot (micro, mini or standard) you're trading.
The amount of starting capital will also affect the income (in dollars). If looking to get an income from trading, then it is better to save up more capital than to try to start with a smaller amount that leaves you disappointed with the income produced and doesn't compensate you for the time you are putting in.