BUT, there are five numbers you’d want to crunch to determine whether $100 will be enough to keep trading in your forex account.
What are these five numbers?
- Your forex broker’s minimum account opening requirement (I’m assuming you don’t yet have a forex broker account)
- Your account’s leverage.
- The maximum number of open positions you will likely hold at any one time.
- Your average trade size.
- Your maximum drawdown.
With these five numbers you will be able to calculate how much you will need to trade your forex system or method.
By ignoring this number you could be in for a shock as you begin trading your system as you’ll find once your system exceeds this calculated balance that your forex broker will begin closing down positions to maintain your margin with all of your open positions.
Therefore, ignoring this calculation is at your own forex trading account peril!
How much money do I need to actually start forex trading?
The optimum amount to start forex trading will depend on the following answers to questions:
1. What is your leverage?
Find out what leverage your forex account is. If you’re in the United States you are likely limited to 50:1 leverage, whereas elsewhere it could be as high as 500:1.
As a running example through these questions we will use 50:1, or to convert this to the type of number we need, we will transform it to a percentage 1/50 = 2%.
2. How many open positions would you hold at any one time?
Even if you’re only trading one currency pair, work out how many positions you would have open at any one time. If you’re trading an automated robot system you should have demo traded and seen how many open trades the system had.
Another approach is to also guess how many positions could be opened at once. For example, if I’m trading 20 currency pairs and I only allow two positions in any one currency then I know I could have 40 open positions (20 x 2).
Let’s assume for our running example that we have a maximum of 20 open positions.
3. What is your average lot size?
What is the average quantity of your trading size? For example, you might only trade 1 mini lot, or 0.01, per trade. Or you might trade one standard lot, or 1.0, per trade.
With our running example we will assume an average lot size of 0.03.
4. What is your maximum dollar drawdown?
Our last metric needed, is to find out what our drawdown is in dollar terms (generally drawdown is given as a negative percentage figure). Answering this question would require some experience with a few demo accounts (or live account).
Drawdown is the measure of how much a system loses before resuming profitability. As an example, if a trading account wipes out then its drawdown percentage is -100% or, in dollar amounts, whatever the value of the account was (eg. -$500).
With our running example let’s assume the drawdown for our system was -$3,512.
5. Calculate your trading account starting balance
So to calculate how much money you need to start trading forex with the four numbers you have are used as follows:
Multiply the first three answers together along with the standard contract size (100,000):
2 \times 20 \times 0.03 \times 100,000 = 1,200
This first amount calculated is the amount needed in margin, in other words the amount needed to hold your positions open.
Next we add that number above to our drawdown figure (change the drawdown figure to a positive number by removing the negative sign):
1,200 + 3,512 = 4,712
It is this final calculation performed that we have now determined what our starting forex trading balance needs to be. Should our calculated figure be less than the required account opening balance, then we would open our account with the forex broker’s required opening balance.
Continuing with our running example, if our forex broker had a minimum account balance of $5,000 then as our calculated balance is less than the account minimum, we would open our account with the required minimum.
Hopefully this guide has helped you to know how much will be needed to transfer into your forex trading account to begin trading successfully and without being margin called.
Should you open more positions that you had calculated above, or should the average trade size of your positions be higher than what you calculated above, or should your drawdown exceed what you had anticipated then you will need additional funds in your account.
You therefore may want to add additional loading to your final number above just to be sure you have sufficient cash available.
If your account exceeds the margin threshold needed for your forex broker to maintain your open positions then it will systematically begin closing trades down. You may also risk the possibility of having your trading privileges suspended or even your account closed if you’re not being diligent enough with your account.
Therefore, knowing what balance you need for your trading system is very important to the success of your forex trading account.