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.
Consider A Demo Trading Account
The first thing you need before you can consider investing you own money in the markets is experience. Not experience in the sense of trading the markets over ups and downs per se, but the experience of using a forex trading platform, the experience of executing trades, and the experience of testing out different positions in a safe, risk free environment. The best way to achieve this level of experience before you hit the markets for real is through a demo trading account. A demo account is essentially an account with a forex broker that allows you to trade the real markets in real time, only with virtual currency. This enables you to become familiar with the markets and how to trade without losing any money in the process – a bonus, and a must-have for any new trader.
While demo trading is all well and good, you’re going to need to get yourself to a stage where you have some capital to invest in the markets for real. With forex trading, this doesn’t have to be an astronomical sum. Bear in mind that when you’re trading the forex markets, you’re effectively trading on as much as 99.8% leverage (see below for more information on trading capital). That means you only need to cover 0.2% of your trading account, so it can be possible to have a notionally decent trading account with much less of a capital outlay in the first instance. Remember in any event that you should only trade what you can afford to lose, given the risky nature of the forex markets.
A Forex Trading Account
In addition to accessible capital to trade, you also need a trading account through which to access the markets and actually execute your orders. Choosing a forex account and a broker is a more time consuming and complex task that it might appear on the face of things, and as a highly competitive market there is legwork to be done to find the best deal. And it’s worth doing – the differences between the most expensive providers and the cheapest providers are considerable when multiplied over a number of transactions, so you owe it to yourself to find the best deal and effectively the lowest handicap to your overall profits.
A diary is a wise investment at this stage, or even an electronic calendar will suffice. There are certain weekly, monthly, quarterly and annual events and announcements you need to take note of, where interest rates are being set for example, or where other instances of importance to currency values occur. These happen on pre-published dates, and it’s important that as you uncover these in your research, you make a note of when announcements are being made and when data is being released so you can keep on top of your trading decisions in the run up to it. This will help you keep track of everything that’s going on that concerns your portfolio.
You also need a strategy in place if you’re hoping to get started trading with any success. A strategy is what sets your trading in context and gives you the ability to set and reach targets on a consistent basis. Strategies take out much of the research work involved in finding profitable trading opportunities, by setting defined ways in which you can trade. For example, if you’re employing a day trading strategy, you will be necessarily looking for the most wide-ranging trends over the shortest period of time, because of the requirements of your strategy. Strategies give guidance and support to your trading, and are pivotal in your long-term success.
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 (even low leverage 30:1 will give you the power of $3,000). 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.
The Simple Maths
Imagine you had $5,000 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 $1,667 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.