“What’s the Bare Minimum I Can Trade?”
By Sean Hyman, Currency Analyst
I hear this all the time when I’m teaching newbie Forex traders…
“How little (dollar wise) can I get started with?” That’s not the right question to ask. Instead, it’s always better to ask: “How much SHOULD I start trading with?”
Being undercapitalized is one of the biggest mistakes in any market, but it’s particularly a problem in a higher leveraged market like the Forex market. In my opinion, a trader ought to have at least US$2,000 to US$3,000 in their account for every mini-lot you plan to trade.
(Remember: Mini-lots involve trading 10,000 units of currency, as opposed to $100,000 units of currency with standard lots. This is how you figure out how much leverage you’re using in the Forex market – mini-lots have less leverage.)
But a few traders try to jump into the Forex market with as little as US$300 in their account. They blow through their accounts quickly because they are risking 30% to 50% minimally on each trade. Well if just one trade doesn’t go right (and that’s likely), you’ve lost third to half of your trading account minimally. That’s just not practical.
Even the professional traders only risk 1% to 5% of their accounts on any one trade. That’s because they understand that sometimes trades go against them, so they only risk 1% to 5% on any one trade.
But still newbie retail Forex traders often risk 20% to 50% of their account balances on each trade, so they have the opportunity to lose up to half their account on just a single trade. That just doesn’t make any sense.
So start off well-capitalized in your trading account so you have room to trade.