Updated 9 July 2020
The foreign exchange market (forex) is one of the most accessible financial markets in the world, and with millions of traders globally, it is also one of the largest.
The low entry barriers and high leverage (borrowed capital) available mean that novice traders can test the water with small deposits. And there is the potential to work towards decent returns as you become more experienced and refine your trading strategies.
Although you are unlikely to make large profits trading forex with a low budget, it is a useful way to learn the ropes and try your hand at trading without taking undue risks.
In this article, we look at the advantages and limitations of starting out with a small deposit and offer some tips on forex trading with a limited budget.
You don’t actually need any money at all to begin forex trading – if you are completely new to forex and want to find out if it is for you then you can start for free using a demo account where you will trade with virtual money.
Also known as practice or simulated accounts, these are available on most forex trading platforms. They allow potential forex traders to experience live markets for themselves before investing and are an ideal way to test out strategies and make mistakes (as all traders inevitably will) without the risk of losing capital.
While demo accounts are a useful testing ground, if you are serious about trying your hand at forex trading, at some stage you will need to make the leap into investing your own money. Even then, it is possible to get started with a very small initial deposit.
For day trading in forex, there is no legal minimum amount required. The deposit you need will depend on the broker you choose to use; most will allow you to open an account with $500. Many will accept an initial deposit of just $100 and some will go even lower.
However, while it is possible to begin trading forex with a very small amount of money, if your deposit is too low you will struggle to make good use of your account while trading sensibly. Here are some things to consider:
It is generally advised not to risk more than 1% of your capital on each trade. So, if you have a capital of $100, your risk on each trade should be limited to $1, which means you will only make very small gains when betting correctly.
It’s also important to enter a stop-loss order, which automatically closes a trade at a predetermined price to limit your losses. A simple stop-loss order on a day trade would be 10 pips (a pip is the unit of measurement used to express the movement in the exchange rate for a currency pair). For most currency pairs, a pip is the fourth decimal point or 1/100th of a per cent.
Keeping a reasonable stop-loss order in place while trading at $1 would severely limit your ability to trade.
Starting an account with at least $500 will give you greater flexibility in your trading while staying within sensible risk limits, and will also give you a better return on your investment.
A good starting deposit for those on a budget would be between $500 and $1,000. However, this amount will still limit you to day trading. If you want to try swing-trading, which involves holding your position for days, or even weeks, to take advantage of longer-term movements in the market, you will need a starting investment of at least $2,500.
Remember, you should never invest more than you can afford to lose.
While trading forex on a budget is possible, it requires patience, discipline and thorough preparation. In this section, we set out some of our key tips for getting started with a small deposit.
While you should not expect to make a living from trading forex on a budget, over time you can build up a profitable account if you are using proper risk management and developing successful strategies.
Of course, the profits you make will depend on your approach to trading, your understanding of the market and the risks you are prepared to take. And, as mentioned above, you will need to be patient – losses are inevitable and it generally takes traders at least six months to reach a point where they have developed some degree of consistency.
Leverage is used widely in forex and can greatly increase returns for those trading with small capital. Essentially, leverage means borrowing money, usually from your broker, to make a trade. While leverage can help forex traders to earn bigger profits than they would be using their own money, it can also magnify losses so should be used conservatively and with caution.
If you are interested in forex trading but only have a small budget, you should start by learning the fundamentals of risk management and work on developing strategies using a demo account. Once you are confident, you can move onto trading on the live forex market for real.
The forex market is accessible to those on a small budget and, with patience and discipline, there is the potential to make profits as you gain experience.
However, as with all trading, there is a great deal of risk involved. Losses are inevitable, even for the most experienced forex traders. You should be certain that you are comfortable with this before investing your own money, and never trade more than you can afford to lose.
WikiJob does not provide tax, investment or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
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