How Much Do I Need To Start Investing In Forex

How much do i need to start investing in forex

How Much Money Should I Have to Open a FOREX Account?

Where To Start With Forex Trading

You need to make some decisions before opening a live account, and do a bit of soul searching. The answers to these questions will determine how your 30-trade campaign will operate for you.

How much money do you have to put into a currency trading account?

Realistically, it should be at least $300.00 minimum to trade a micro-account with lots of 1,000.

But the amount is your decision. Just remember that it should be risk capital: if it is lost, it will not affect your lifestyle and will not cause you to lose too much sleep.

What do you need for a FOREX grubstake?

For a rough guideline, put aside $300.00 to $500.00 for a micro-account, trading 1,000-pair lots worth $0.10 the pip; $3,000.00 to $5,000.00 for a mini-account, trading 10,000-pair lots worth $1.00 the pip; and $30,000.00 to $50,000.00 for a standard account, trading 100,000-pair lots worth $10.00 the pip.

Many sources will tell you these numbers are high; you can trade those levels with a lot less capital.

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True. If you either are willing to ride along the ragged edge -- or get very lucky early in the game. I would rather you did not do the former and do not count on the latter.

"How much can I make?" you ask? Forget the advertisements you see; no one makes 2,000 pips a month -- at least not for many months.

HOW MUCH MONEY DO YOU NEED TO TRADE FOREX? (Trading Capital Requirements)

Such returns imply an extremely high level of exposure, sure to be the trader's undoing in due time if not jig time.

Consider professional money managers, the best ones who have been trading 10, 20, 30 years.

They are happy to make 15 to 20 percent consistently per annum.

How Much You Need To Start Trading Forex

Fifty percent is a great year. But even the best have a bumpy road. No one makes money every month, every quarter, every year. The long term belongs to those who are not only skilled, but patient, determined, and are willing to sit on their hands much of the time.

Tip: Plot your equity curve on a weekly basis for several months.

It may be a useful diagnostic once you have some data to analyze.

As a trader, I have had as many as 16 consecutive winners. I have also had a dozen consecutive losers.

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But the best answer is to manage the risk as well as you can, and let the market determine how much you make.

Think risk avoidance. You have to break even before you can make a profit.

Two-Day Trader Workouts

The "How Much Do I Have to Trade?" Approach

I will assume you have decided to be day trader.

How Much Trading Capital Do Forex Traders Need?

You can adjust this workout for any of the profiles mentioned in Trading Spaces.

I do recommend you select between day trader and scalper. Guerilla and position traders at the extremes have special needs and skill sets.

There are a lot of numbers to figure, and most of them are co-dependent.

For an example, let us work with a grubstake of $3,000.00. This seems to be a fairly typical level for new FOREX participants.

How Much Money Do I Need to Trade Forex?

As I continue, if you have a different number in mind, you can make adjustments by percentages.

I will try working backward from some useful markers to see what size trades you can make and how many simultaneously.

Tip: For the new trader, I recommend only one trade open at a time.

Then move to two, then three. I rarely have more than five open. It just becomes too complicated and you run into the issue of correlation and trading against yourself.

Here I assume you will at some point be open to three simultaneous open trades.

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You never want to be more than 75 percent margined. For this example, that means $2,250.00 in open trades, based on where you open them, with no profits or losses.

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Thus, you can allocate $750.00 to a single position based on what we have down now.

At a 50:1 leverage rate, your account is able to absorb a 750 × 50 = 37,500 lot size.

Assuming you could trade that odd-lot value, your pip would be worth $3.75. So far, it sounds great! But wait ...

What happens if you lose 100 pips on each of those three trades? 100 × 3 = 300 × $3.75 = $1,125.00. Your grubstake is down below $2,250.00. In fact, when it fell below that level, the broker would lend you a hand by dropping one or more of your positions.

Can you see the problem?

Trade Lot Sizing

Thinking in terms of how much you can trade will not work. Of the 100 new FOREX traders who will be shown the door today, 50 of them thought in terms of how much they could trade.

Tip: You need to think in terms of how much you can lose.

That is where the 30-trade campaign enters the picture.

The Risk-Avoidance Approach

Go back to the maximum $2,250.00 to margin.

Divide it by 30.

That yields $75.00. The 30-trade campaign says you can risk $75.00 per trade. You have 30 opportunities to get the ball rolling. But you do not have all the information you need as yet. $75.00 is 7.5 pips at 100,000-pair lot, 75 pips at 10,000-pair lot, and 750 pips at 1,000-pair lot.

How much do i need to start investing in forex

Hold that while we consider your trading profile.

Trade Lot Sizing

A day trader will want to risk 50 to 100 pips and aim for a profit of about two to three times that amount. Both risk and reward are going to vary, but you need a range within which to work, where you will either accept a trade or pass on it.

You can see with $75.00 per trade, you are right in the ballpark at the 10,000-pair lot level.

Here is how the full day trader profile breaks down for a 30-trade campaign

Day Trader Profile Parameters

Pip Gain Goal150 pips
Per-Trade Profit/Loss3:1
Winners/Losers Ratio1:2
  • Campaign Scenario: A day trader makes 10 trades.

    He wins on three and loses on seven. On the winners, he makes 150 pips × 3 = 450 pips.

    How much do i need to start investing in forex

    On the losers, he is -50 × 7 = 350 pips. Life is good, but it depends on keeping the per winners-to-losers ratio from falling.

The success of a trader is always a delicate and precarious thing. You can see from the preceding how small changes in ratios could turn either one of these traders to the negative side.

Tip: Linear changes in parameters can result in exponential changes in results.

Here is the scalper profile:

Scalper Profile Parameters

Pip Gain Goal50 pips
Per-Trade Profit/Loss21
Winners/Losers Ratio1:1
  • Trader Profile 1:
  • Campaign Scenario: A scalper makes 10 trades.

    He wins on five and loses on five. On the winners, he nets 50 × 5 pips = 250 pips. On the losers he nets -25 × 5 = 125 pips. He's okay, but he'll feel cold water if either ratio goes the wrong way for any length of time.

    How much do i need to start investing in forex

    Many scalpers would give an arm to maintain a 2:1 per trade ratio.

30-Trade Campaign Formula

The basic formula for the 30-trade campaign is this:
  • Determine your grubstake
  • Divide it by two-thirds
  • Divide the two-thirds amount by 30
  • This gives you the amount you can risk per trade
Because different trader profiles risk different amounts:
  • Determine -- from your trading profile -- how many pips on average you will risk per trade
  • Use the preceding fourth and fifth bullets to determine your lot size.
Now you have all the numbers for your trader profile!

Again, these are not set in stone, but you do not want to vary by too much, ever.

Perhaps 25 percent at most on any of them.

Two Golden FOREX Ratios

Winners to Losers

This is the number of winning trades against losing trades you have out of a sequence of 10.

Generally, the shorter term you trade, the higher the ratio of winners to losers has to be to stay in the game. A guerilla may need five or six winners out of 10.

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A position trader may need only two or three. This is because the profit-to-loss tends to be different for them.

Tip: I have seen an amazingly high number of traders for whom the difference between winning and losing is between 3 and 4 out of 10.

Three seems to tread water, and at the outset treading water is just fine; you are buying time to learn, already putting yourself ahead of the curve.

How much do i need to start investing in forex

Four seems to make money; five seems to buy new cars and such. But ultimately, your own numbers will tell the story.

Profit to Loss

This is the ratio of your number of winning pips in 10 trades to your number of losing pips in 10 trades, per trade.

This ratio also seems to vary regularly from short-term to long-term trading profiles.

Position traders often have ratios of 3:1 or higher winners to losers, while guerillas often are quite happy to get 1:1 or even a bit below.

Can you see the inverse relationship between the ratios? It is important:

The lower your winners-to-losers ratio, the higher must be your profit-to-loss ratio. Conversely, the higher your winners-to-losers ratio, the lower can be your profit-to-loss ratio.

How much do i need to start investing in forex

This, of course, assumes your first goal is to live to see another day in the markets.

Tip: Find the breakeven for your profile and stay above it.

It is time to cease the monetary soul searching and see how it fits in with the 30-trade campaign program.

Table below gives suggested parameters for all four trading profiles.

[caption id="attachment_13257" align="aligncenter" width="550"] Trader Profiles Golden Ratios[/caption]

Tip: Between your trader profile and the golden ratios for that profile, you should have everything to reasonably identify your trading space.

By Michael Duane Archer

Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii.

He currently trades FOREX and futures and is involved in several technical analysis research projects.

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Copyrighted 2020. Content published with author's permission.