Trading Forex on a Low Budget
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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.
How Much Money Do You Need to Begin Forex Trading?
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.
Tips for Trading on a Budget
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.
Find the right broker. You will need to find a broker who offers accounts at the level of investment you are willing or able to make. You should also make sure that you choose a reputable broker who is part of a regulatory body. In the UK, this would be the Financial Conduct Authority (FCA). And check your broker’s other policies and offerings, such as leverage amounts, commissions and withdrawal policies.
Take the time to learn. Before you begin trading with real money, you should make sure you fully understand basic concepts of forex trading, such as risk management and analysis techniques. Read in-depth articles around the subject and, if possible, speak to people who are experienced and successful in forex trading. Online academies such as FX Academy also offer a wealth of information and resources. Once you feel that you have a handle on forex trading, try out your approach on a demo account before risking your own capital. And remember that you will need to keep on learning and adapting your approach as market conditions and regulations change.
Monitor your gains in percentage terms. Viewing your successes in percentage increases rather than dollars or pounds will help to give you a clearer idea of how you’re doing relative to your investment. For example, a gain of $50 may not feel like much, but on a $500 account, it’s 10%, which suddenly seems more significant. View your forex trading as a business, where trading performance over time is more important than daily or weekly wins and losses.
Be realistic with your profit targets. If you’re starting with a small amount of capital it is unlikely that you will be making large profits in the near future, so don’t set yourself unattainable targets that will leave you feeling discouraged. It is more important to focus on achieving small, consistent profits that will gradually add up as time goes on.
Invest small but regularly. If you’re starting out on a budget, you should aim to invest small amounts weekly while you hone your craft and refine your strategies. Investing $5 to $10 a week will allow you to learn the ropes, make mistakes and lose trades without putting too big a dent in your capital. Over time, these small investments will start to add up and you can work your way up to trading larger amounts.
Be patient. If you only have a small amount to work with then your progress will be slow, which can become frustrating. But if you stay disciplined and put in the time and effort, you should gradually start to see results.
Control your emotions. It is easy to get swept up in the excitement of trades and make rash decisions. To trade forex successfully, you need to keep a clear, level head, especially if you have a tight budget.
Can Small Budget Forex Trading Be Profitable?
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.
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