Trading Budget
How much money do I need to trade forex?
There are various amounts you need to invest, depending on the broker you decide to trade with. Some brokers offer the ability to trade with a mere $25.00 however, most require a minimum deposit $250. Here at AvaTrade, we offer a minimum investment entry of just $100. It’s good to know though that these types of smaller investments are ok to start you off; however they will not result in any serious profits. Becoming a serious forex trader, your initial investment will play a colossal role in determining your success.
There are many brokers in the FX industry, and with that comes a number of different traders that trade in many ways. Day traders for instance, will not need to trade with the same capital outlay as a swing trader does. You will need to define your goals: are you looking for a more of a high income or to simply grow your trading account?
Why the initial investment matters?
There is a trade difference if you start with $100 versus $2000, and yes it does matter. One of the more significant problems new traders face is being under-capitalised. When you start trading your goal is to have some profit or income from your investment. This cannot be accomplished on a $20 account. Most new traders have no patience to allow their accounts to grow, and with small deposits you risk far too much on each trade, and thus risk losing the entire initial investment.
Some brokers offer you a trading bonus, which is an additional boost to your capital to get your trades going. This can amplify your trading capital allowing you to open more trades, however, keep in mind not to over-extend yourself per trade, look at a market exposure ratio of 2-5% of your account to be safe. Another recommendation when receiving a broker bonus is to read the terms and conditions to fully understand them. Most brokers do require you to trade a certain volume in order to withdraw funds from the account. All-in-all a welcome bonus is a great way to increase the available trading budget. However well-regulated brokers are now unable to offer them as the regulators have deemed then unlawful.
Leveraging your trades
Brokers allow traders to use leveraged trading to assist in increasing the available position size of each trade, while they have invested a small amount of capital. This fraction of what it costs to open a trade, that you personally invest, is called margin. Trading on margin makes the amount you either gain or lose seem very high in relation to what you invested.
For example, this is how leverage and margin work:
Leverage of 10:1 would mean that a deposit (margin outlay) of $100 allows you the same trading potential as if you had invested $1000. Should you want to open a position and buy 1000 shares on ABC Ltd. and the current price is $1 per share it will cost you $1000. If the share price increases by 20c (per share), then you could sell your 1000 shares at $1.20 and make a $200 profit.
Should you use leverage of 10X eg. 10:1 you would pay $100 out of your margin, and the position would be ‘worth’ $1000 (10 x $1 x 1000 shares = $100). Should the share price rise again from $1 to $1.20 you would still make the exact same profit however you have only exposed $100 rather than $1000 of your equity to the markets, thereby decreasing your risk. Also, the return on your investment was 200% with leverage, as opposed to 20% when using only your own funds. Remember though, that leverage increases your risk just as much as your potential reward.
AvaTrade offers up to leverage, but the leverage will differ per instrument. However, it is not always necessary to take it in full, the more you invest the less leverage you will need. Having an operational budget of around $5000 allows you as a trader to firstly, open bigger positions, and secondly, enter the markets however volatile, and hold positions for longer even if they are going against you on the short-term, without the fear of depleting your account too fast. Why you might ask? As with higher margins, you have the capital to allow markets to recover, as well as the possibility to enter into a profitable price range easier.
To learn more and trade better, AvaTrade has developed articles and guides on how to manage your trading budget and understand your position size. Please refer to our articles for a more in-depth explanation of these essential topics. The first rule when you are entering the forex trading world is: you should never invest money that you cannot afford to lose. Be certain before getting your feet wet, that you learn as much as possible, practice on your free demo account (aka paper trading account), and then save enough to open and maintain a substantial account. You can also use our trading calculator in order to estimate the possible outcome of a trade before entering it.
Trading budget main FAQs
- How can I start trading with little money?
You can start trading with as little as $100 at AvaTrade, and while you certainly won’t get rich when you trade such a small account you will receive very valuable experience. As time goes on you can also add to that amount, growing your account through deposits as well as the potential profits from your trading activity. Over time as your account grows you will find yourself able to take larger positions, which is also a good way to grow as a trader rather than jumping in and trade a large amount without experience.
- How can I increase my trading budget?
The easiest way to increase your trading budget as a new trader is to simply drip feed a regular amount of cash into your trading account. Even if you’re only able to set aside $100 a month for your trading account you’ll be surprised at how fast it will grow. Also learn to use leverage because that has a similar effect to increasing your actual trading capital. By using even 1:10 leverage you can turn a $1,000 trading account into a $10,000 trading account. This can also help to grow your trading capital more rapidly if your trading decisions are sound.
- How do you determine an appropriate trading budget?
The trading budget is going to be different for everyone depending on their needs and available capital. Those who already have a good paying job will often be able to set aside more for their trading activities than those working minimum wage. Single folk often have more disposable cash for trading than couples with children. You’ll also want to consider the goal of your trading. Is it for retirement? Maybe it’s just to generate money for vacation and holiday expenses. Or you could be trying to replace your monthly income with trading income. Each scenario will have different needs for the trading budget.
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