The stock market has long been known as an outlet for putting one’s money to work for them. By accumulating capital and making smart investments, people can gradually enjoy phenomenal growth in their portfolios and use that for everything from college education to retirement. While stocks are by far the most popular form of investment, other instruments – such as commodities and forex – also provide ample investment opportunities.
With forex in particular, the markets are a highly opportune place for individuals from all walks of life to invest, speculate and otherwise earn profit. While many types of investments require large sums to be truly successful, anybody can begin playing the forex markets – even those with relatively little money.
Despite this, one of the most common questions is how much money is needed to get started with forex. Depending on the exact goals, that answer can vary. Let’s examine the basics of forex trading and some examples of what to expect with various levels of investment.
Basic Guidelines for Forex Trading
Before any trades are executed in the forex market, it is crucial that individuals spend the appropriate amount of time learning about the basics. Ultimately, the most successful traders in forex adhere to a series of personal guidelines and regulations: this helps take emotion out of the equation and ensures that any losses are effectively minimal. The most common rule regarding maximum risk is to never expose more than one percent of your total account to loss via any one trade.
Risk is formally determined by the difference between your entry price for an order and the stop-loss order, and also involves understanding the use of pips. Pips are the smallest unit difference available in forex, and are usually represented by one one-hundredth of one percent. In this particular situation, and in line with the above advice regarding risk, you would never expose yourself to more than 100 pips’ worth of risk with any individual trade.
Equally important to understand is how the forex market works when you execute orders. Simply put, any and all forex transactions occur in pairs: when you trade on the market, you are buying and selling in currency pairs. The two paired currencies in question are essentially fighting against one another; whether you buy one or sell the other is determined by how strong or weak you expect each currency to become in the future. Individuals trading currency pairs can make money from both expecting one currency to strengthen or another currency to weaken.
There are many currency pairs available to be traded, but there are a few that are found on virtually every trading platform. These currencies – known as majors – include EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD & NZD/USD.
Minimum Capital Needed for Forex Trading
One of the most common questions – and the question you’re asking right now – is how much money is actually needed to begin forex trading. Unlike many other commodities and instruments, there is no legally-defined minimum necessary for trading currencies. However, pretty much every trading platform in existence will require at least $100 of initial investment in order to open up a forex account for you. For the true beginner, $100 can be just the perfect amount to dip their toes in the water and begin learning the ropes of forex without substantial risk (for those who need instant credit for forex and beyond, learn more here).
However, it’s worth noting that when investing a mere $100 – and following the previous advice regarding risk – the amount of profit earned per transaction is relatively minimal. With an initial investment of this size, growing your account will take a comparatively long time. While percentage-based growth can be achieved all the same regardless of the amount deposited, absolute growth (in terms of dollars profited) ideally needs a much larger investment to truly begin seeing sizeable gains.
It is recommended that individuals who want to begin seeing meaningful gains from day-trading via forex deposit at least $500 to get the ball rolling. With such an investment and careful monitoring throughout the day, traders can earn several percentage points of their initial investment under the right circumstances. However, this amount obviously will not be enough to quit your day job and begin trading forex on a full-time basis.
Ideal Capital Needed for Forex Trading
While anybody can get started in forex trading with as little as one hundred dollars, the ideal amount to invest – once you’ve mastered the basics – is considerably higher. While the minimum that is usually recommended is a few hundred dollars, the best entry-level forex setup generally will start in the vicinity of $5000. With this initial capital, you are not exposing yourself to too much risk, but you also have the ability to make each trade earn meaningful amounts of money.
By having $5000 to begin trading with and by following the advice regarding risk, each trade can yield (or potentially lose) up to $50. This is a solid amount of profit – particularly for day-traders – and simultaneously ensures that your risk is not larger (in most cases) than what an individual would earn from a single day of work.
At this point, those trading on the margins during daytime hours can begin to build a significant amount of wealth – ultimately paving the way for financial freedom. In the event an individual can invest (or accumulate) between $10,000 to $20,000 into their forex account, it suddenly becomes possible to earn a sustainable amount of income with minimal risk. After this point, making a full-time career via forex trading is a viable long-term strategy.
Ultimately, forex trading is arguably the easiest form of investment trading that everyday people can jump into, understand and earn profit. While anybody can get started with forex trading with as little as one hundred dollars, it is recommended that at least $500 be invested into an account initially for the best results. With as little as a few thousand dollars, those who understand the basics of forex can begin earning sizeable profits via day-trading without exposing themselves to unnecessarily large amounts of risk.