How much capital is needed Forex trading?

I often get asked how much capital is needed for Foreign exchange trading, a number of people that I end up talking to think that in order to be able to trade Foreign exchange one must have a lot of disposable income. This is a bit of a misconception, since the rise of the internet in the late 90’s and the introduction of leveraged finance in the 80’s, the financial markets have become much more accessible for the average man on the street.  It is now possible to open a real money account with a regulated brokerage for as little as $5. This means that the majority of people in the Western World could realistically trade Foreign exchange if they wanted too.

Their is however a different issue at stake and that is how much capital (or money) does one need to successfully trade Foreign exchange. Is success only realistic for those who have vast capital reserves, or can the man depositing $5 into his account have a shot at making money from Foreign exchange trading.

Those trading with very small amounts in their accounts are likely going to need to use significant leverage in order to even trader micro lots. While leverage gives traders the chance to increase their profits, it also increases your risk significantly and can lead to your account being wiped out completely by only small swings in the marketplace. This makes it much more difficult to make profit, as you have to be constantly concerned and may be forced to close your trade early missing out on significant opportunities to make profit.

As it has been pointed out in a number of pieces, by working with limited funds traders limit the range of brokerages open to them. For instance Dukascopy a leading ECN brokerage only accept clients who are willing deposit over $2,000. Dukascopy provide an excellent quality of service and also offer very tight spreads on the currency pairings they offer. This means that you can maximize your profits and also engage in scalping strategies which would be available to those trading with brokerages who offer wider spreads.

I have also seen some statistics from some leading brokerages which suggest that those who have larger deposits are more likely to be successful with their trading. Statistics from FXCM UK show that those who only have $100-500, were the least likely to be profitable traders. These suggests that having more in your account may help you, or simply that more serious or successful traders tend to accumulate more cash into their accounts or just deposit bigger.

All in all, in my personal experience a good amount starting of capital for most traders would be around the $500 mark. It’s a good amount to start out with, and should mean that you don’t have to take on excessive leverage. Of course having more cash in your account doesn’t guarantee success, as Forex always involves risk. I’m also sure that there are a number of traders who can take $5 and turn it into a very impressive account.

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