The question above, as commonplace as it seems, is still asked by many people who’re interested in Forex trading. How much do you need to invest for optimal returns? How much is needed for full-time or part-time trading? This piece is my take on the subject.
In one of his past articles, the world-famous Dr. Van. K. Tharp stresses one of the most important reasons why most people find it very difficult to make money in the markets. One of the most important reasons is that most people don’t have enough money. Too many people open accounts with too little money, so they can’t execute proper money management, neither can they expect to live on small accounts.
You can open a Forex account with $1; you can also open it with $50 billion. While most brokers have minimum deposits limit, they’ve no maximum deposits limit. Some brokers even offer micro or mini and/or cent accounts so that traders with small money can trade while having many options to control risk. Happily, gone are the days when traders needed huge amounts of money to capitalize on market opportunities. Nowadays, high leverage allows you to make larger transactions with smaller capitals. High leverage is a curse to those who’re ignorant of sound position sizing and risk control, while it’s a blessing to those who’re aware of that.
The bigger your capital, the bigger your returns, and the smaller your capital, the smaller your returns. Let’s assume trader A opens an account with $1000, trader B opens an account with $10,000 and trader C opens an account with $100,000. If traders A, B and C make 20% each on their respective accounts on an annual basis, here’s their personal income in that year.
Trader A makes $200. Trader B makes $2,000, whereas Trader C makes $20,000. You see, hedge funds managers make billions or millions of dollars as profits because they invest billions and millions of dollars.
As you probably know, your account must be big before you can make good profits (for a small percentage gain would make a huge difference). You can open an account with small money; say $50 or $250 or $500. However, don’t expect to make a living from such small capital. Personally, I believe that if one want’s to make a living from trading, one’s account mustn’t be less than $20,000. This would give you an excellent position sizing and risk control flexibility. You need to check my strategies articles and see my position sizing recommendations for each various account balances. You’ll then see why it pays to have big accounts.
For you to make a living from $1,000 or $5,000 or $10,000, you need higher risk, which also comes with a possibility of a worrisome roll-down. With $100 or $300 or $500, one can experience the thrill of speculation, but one must never expect to make a living from that. Those who want to make a living from an account that’s small would need to double the account many times. Do you know what that’s? It’s called suicide trading. This is because what can double your account also has the potential to result in big losses or a margin call.
If you’d like to open a big account but your financial circumstances preclude you from doing that, you can still open a small account and begin to trade. Just don’t expect big profits from a small account; which means that you need to be realistic and lower your expectations. As long as you have other source(s) of income, you should be fine, and there shouldn’t be any pressure on you to double your account quickly.
Conclusion: You can start trading with a very small account, but that one has fewer merits than a big account. Evidently, you need big accounts to trade safely and make decent profits. As you trade, you shouldn’t forget to have entry and exit points in mind. Great speculators have an exit target for each of their position, whether the position ends in a positive zone or a negative zone. Then don’t risk too much per trade. Risking less per trade would surely give you good profits as you also have the ability to curtail losses so that they don’t have a big impact on your portfolio. Long-term survival in the trading world means that your past errors have made you to become a better trader.
The quote below is taken from Dr. Chris Kacher. It shows that it isn’t correct to say that one can’t enjoy lasting success in the markets.
“I realized the efficient market theory was not relevant in the real world when it came to developing a sound strategy that put the odds in its favor. In the long run, statistics always win, and is why the house in gambling casinos always comes out ahead.” (Source: Tradersonline-mag.com)
Source: www.paxforex.com
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