i. Forex trading can be started with as little as $50
ii. Leverage makes it easy to trade forex with small capital.
iii. If you live off trading profits, then you’ll need big capital.
Does forex trading actually require big capital?
As the forex market has become more and more accessible to the general public, the barrier to entry in the forex market has been getting lower and lower.
So it is just a myth that traders looking to trade in the forex markets require big capital in their account.
As the retail participants started getting involved in the forex markets, there was a sudden rise in the broker industry.
Many brokerage firms got established and each wanted to acquire clients for their services. This led to lots of competition in the broker industry.
In order to attract clients to trade with them, brokers started offering lots of services to the clients. These included a smoother payment process, better execution, lower transaction costs, and higher leverage.
Leverage is basically a loan that the trader gets from the broker. The loan amount is not exactly transferred into the trader’s account but is rather a line of credit that is reflected in their trading account.
Leverage allows traders to trade with a capital that is much more than the capital that is actually present in their trading account.
Presently, brokers have been offering clients leverage of 1:500. This means that traders that have accounts with these brokers can trade in the forex market with 500 times the capital in their account.
They can enter into positions in the currency pairs while having only a fraction of the total value of the position, in the trading account.
For instance, a trader has an account with a broker that is providing him leverage of 1:500 and the trader has deposited $100 in the account.
The trader will then be able to buy or sell currency pairs worth up to $50,000. This is more of a boon for those traders that do not have much capital for trading in the forex markets, as this now allows them to trade even with less capital.
Brokers these days do not have any strict minimum account deposit requirements. Traders can open a trading account with a minimum deposit of around $50.
Owing to the participation of the retail traders in the forex market, there have been some changes made in order to make it easier for the retail participants to trade currencies.
Traders do not trade one or two units of currency pairs but are required to either buy or sell a lot of the currency pair which consists of a certain number of units of the currency pair.
The standard lot consists of 100,000 units of the currency. Smaller lot sizes have been introduced which consists of lesser units of the currencies.
The mini lot consists of 10,000 units of the currency. There are micro lots and nano lots that consist of 1,000 and 100 units of currencies respectively.
I have just stated the prevalent facts of the forex market and have proved that traders do not require any specific capital limit let alone any big capital, in order to start trading in the forex market.
When is big capital required?
Trading is an activity of managing risk and capitalizing on the price movements in order to earn profits. Where there a chance of profits, there is always risk associated with it.
Only in the rarest cases, it happens that profits are earned without any risk.
I have already proved that traders do not require a big capital in their trading account for getting started in the forex market. You can always start trading with whatever capital you have at your disposal.
There are mostly two types of traders in the forex market. First, those traders that trade in the forex market as a side hustle and treat the income generated from trading in forex as a passive and secondary source of income.
Second, those traders that trade forex full time and the profit made from trading is their primary source of income.
The first class of traders would generally have another source of primary income which they pursue full time. The income could be generated from running a business or working at a job.
These types of traders would indulge in trading in order to generate additional income or to build wealth in the long term.
These types of traders would usually start with less capital in their trading account. Since they do not trade full time and they have to look after their primary income source, they cannot risk much capital for trading.
They are comfortable with risking less in order to make the profits that they make trading in the forex market.
It is not that these traders will always have small capital in their trading account. These traders may choose to accumulate profits and reinvest them for trading the currencies and allow compounding to work for their benefit.
The second type of trader depends on the forex market for their bread and butter. They do not have an alternate source of income and hence trade currencies full time.
Since these traders have to pay their bills from the profits made in trading, they will require a relatively bigger capital. The bigger capital will allow them to relatively risk more in order to earn bigger.
These traders always look to grow their trading by reinvesting the surplus profits after paying their bills for living.
The point to be drawn here is that, if a trader seeks to live completely off profits made trading the forex market then he will require a bigger capital to trade.
While those who do not depend on trading profits for their livelihood can start forex trading with a smaller account.
Where there is a risk, there is profit
Profits are made upon risk taken. There is no profit earned without any inherent risk. Every trade is placed with an aim to profit but by also taken a calculated risk.
In order to survive in this profession of trading, traders must take smaller losses than the profits that they book on their trades.
In small capital or big capital, the risk taken is the same. It is a common risk management method of not risking more than 1% of the total capital at any given time on any given trade.
What I want to infer from this is that traders must not get discouraged after they hear that they cannot make it big in forex if they start with less capital.
Traders that look to trading as a get-rich-quick scheme will never be able to succeed in it, as they will never be able to manage risk properly according to their expectations.
For instance, a trader with a capital of $100 will risk $1 per trade, while a trader with a capital of $10,000 will risk $100 per trade. The risk taken by both traders is the same in relation to the capital at their disposal.
Their profits will also vary as their risk taken varies. The former will profit way less than what the latter will profit considered their analysis works.
Do you think a big capital is needed to trade forex?
I have discussed a lot on this topic above and have fairly bust some myths, but do you think forex trading requires big capital?
Do let me know what you think about this. Also, don’t forget to share this blog post with others and let them also get an eye-opener.
You can always ask your questions or doubts or anything else in the comments section and I will get back to you all.