How Much To Start Trading
Forex trading is a market accessible unlike any other. For traders looking to get started trading forex, the barriers to entry over which they must climb are fewer and less substantial than with virtually any other form of trading, and as a result forex appeals even more so to new traders looking for an in. In terms of resources, the degrees of leverage on offer to forex traders mean you need very little to get started, and depending on the levels of returns you’re looking to achieve, you investment in forex can be comparatively less than that which would feasibly be needed to deliver an income from trading other markets and instruments.
When you’re trading forex, leverage tends to gear upwards towards 500:1. Even if we assume a rate of 300:1, every £100 you invest gives you buying power of £30,000. This effectively means you can get started trading forex with very little cash. That said, you obviously want to make sure you have access to sufficient resources to cover your liabilities, and to trade more than one position to diversify your risk. Furthermore, if you want to be in a position where you can generate a full time income from your trading, you need to think a bit more seriously about the numbers and how they stack up.
Imagine you had £5000 to invest in forex. With a leverage ratio of 400:1 available to you, you have a total buying power of £2,000,000. If you could grow your account by just 0.1% per day, you would earn £2000 – a 40% return on your investment. This degree of leverage makes it difficult not to generate a return – so long as you do your research and avoid backing trends in the wrong direction.
Say you wanted to earn £20,000 across a year, and you were satisfied that a 0.5% monthly return was possible from your trading. You would need to earn £1667 per month from your trading in order to meet your annual target, and you would have 5% yield in each month to achieve it. Your capital requirement would be £830.50 at a leverage ratio of 400:1. As you can see, it doesn’t take much capital to get things moving with forex, and if you can manage to generate better returns and compound the earnings to increase your trading capital, you will notice even more rapid growth in your portfolio.
Remember that these scenarios assume perfect trading conditions – sadly, that doesn’t reflect real life, and there will always be complications along the way. Losing positions are an inevitable part of trading financial markets, and because of the massive degrees of leverage at play in forex trading you need to be constantly on your guard and ensure your account is sufficiently buffered at all times to prevent damaging your capital.
For that reason, you should always invest more capital than you intend to trade, leaving a cash reserve sitting in your online forex account to cover any positions that turn against you in the short term. Forex is a highly risky business, and while you might not need much to get started, it’s crucial you’ve got enough to feed your portfolio and provide a shock absorber for when things go wrong.