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How Much Trading Capital Do Forex Traders Need?

Have you been considering day trading Forex and looking for the perfect amount of capital you need to begin trading successfully? Look no further. This article will outline what determines the capital requirements and how much trading capital Forex traders need depending on their strategy.

So, what are you waiting for? Read on and learn to start trading Forex with $100!

What is Forex Trading?

Forex trading is the exchange of foreign currencies between buyers and sellers at an agreed price in the Forex market. These transactions occur digitally in global over-the-counter markets.

The markets are open 24 hours a day, 5 days a week. With currencies being traded in major financial centers worldwide, there is always activity in the market.

Forex Trading has become a popular way for retail traders to make income due to the emergence of multiple free online brokers such as XM.

What Determines the Trading Capital Required for Forex Trading?

Multiple factors determine the amount of capital required for Forex Trading. These include:

The Broker:

There are multiple brokers and trading platforms available for the individual trader. Brokers have their trading terms, and the trader needs to agree to them before opening an account.

Some brokers will allow as little as five dollars to begin, but they also need to ensure that the amount of capital being used is safe. Using too little capital is not always the best option as the trader risks losing it all in a trade.

Types of Account:

The type of account you use will significantly impact the amount of capital you need. The difference in account type is the amount each lot will have.

For a micro account, you can have a minimum account balance of $5, but if you have $50, you will be safe from margin calls.

For a standard account, the minimum capital required is $500, but some brokers may need you to have more. However, having $1000 is the safest amount to have to avoid a margin call.

For an executive account, the minimum capital required is $5,000, and it is safest to have at least $10,000 to avoid a margin call.

The Lot Size:

Lot sizes affect the free margin. The lot size depends on the type of account you open. Micro lot sizes have a relatively small used margin, whereas standard and executive lot sizes have a higher used margin.

The Trading Strategy You Use:

The trading strategy employed is also crucial when deciding the capital a trader should have.

If you are a scalper, you may require a decent amount of capital to take advantage of larger lot volumes and gain better returns.

If you are a swing or long-term trader, you may need to have a significant amount of capital to cater to the required margin for multiple trades.

How Much Trading Capital Do Forex Traders Need?

The most significant determinant of the capital required for Forex trading is the trading strategy employed. There are three primary strategies:

Scalping:

Capital amounts between $2,000-and $5,000 are advised for day traders using a scalping strategy.

Here’s an example of a scalping strategy with a capital of $3,000 and a 1% trade risk.

  • Capital of $3,000
  • Position 0.3
  • Stop loss 10 pips
  • Take profit 15 pips
  • Potential loss of $30
  • Potential profit of $45

Swing Trading:

Swing trading is more leisurely, and therefore having a pip range between 100 to 20 means, you can hold positions longer and take advantage of highs and lows.

Here’s an example of swing trading with a capital of $5000 and a risk of 1%

  • Capital of $5,000
  • Position 0.1
  • Stop loss 50 pips
  • Take profit 80 pips
  • Potential loss of $50
  • Potential profit of $80

Long-Term:

For longer-term trades, the entry pip size can be anywhere between 300-500 as risk evens out in the long term.

Here’s an example with capital 5000 and 3% risk:

  • Capital of $5,000
  • Position 0.01
  • Stop loss 300 pips
  • Take profit 800 pips
  • Potential loss of $30
  • Potential profit of $80

Bottom Line

Forex trading is inherently a risky trading prospect compared to the likes of stock or bond trading. There is a lot more volatility and uncertainty involved. The decentralized nature of the market means that there are few protective policies employed to benefit traders.

However, if you are a savvy enough trader with a bit of extra cash that you can lose without jeopardizing your financial solvency, then Forex trading is an excellent way to make extra cash.

Hopefully, this article gave you insights into how much trading capital Forex traders need, which has piqued your interest in Forex trading.

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