I often get a lot of questions on how much initial funding is needed to start trading Forex? I have found that a lot of new traders have the mindset to start trading with as little money as possible. Funding your Forex account with the right amount is a part of successful trading practices.
Being under capitalized is a common mistake of all novice traders and poses risks of having large draw-downs or even loosing all the initial deposited balance.
Forex trading is like any business and needs to be treated so. Once you are trading live Forex is your business and once funded your business is up and running. This is why its common amongst all professional traders to establish a business plan. You are essentially your own fund manager and exist to make a profit. Being under capitalized in any business is a sure way of failure.
It is often said that never fund your Forex account with money you can’t afford to lose. Having this kind of mindset is flawed. With acknowledging this statement will inevitably set yourself up “subconsciously” to lose. You are there to grow your money, not to get rich. With any investment poses risks but we don’t go into business with the analogy that we are prepared to lose a set amount of money. We go into business with the mind set that we are prepared to make a set amount of money.
With in your business plan you need to know what your anticipated outcome will be. What risks are you willing to take and what kind of profit margin are you looking at.
If you aim is to make $1000 per month you first need to look at how much capitol you need to start with. How much draw down you need to allow for with your trading style.
The higher the account balance to achieve that $1000 per month will reduce this associated risks. If we look at the average profitable retail trader, profit margin is around 10% per month. To achieve that $1000 per month would require a balance of $10,000. Funding your account with $20,000 may be a better option as risk can be reduced by half, whilst also reducing stress. Forex trading is more about money management than anything else.
Trading on live accounts with small balances is good for practicing and taming your emotions, but being under capitalized is another thing. You may be a retiree with a retirement fund of $250,000 and looking for an income for living costs. Funding an account of $100,000 and working off 5% monthly profit would be also be sustainable approach to correct account funding. We all don’t have $100,000 to fund a Forex account so we must take a realistic approach when looking at our intended profit margin goals.
Funding your Forex account with the right amount will always be determined with your intended outcome. Money management is by far the most important aspect of trading accompanied with a well thought out business plan.