So how much money is really needed to start trading a Forex account with real money? There are two answers to this question.
- Your broker’s answer
- Your answer
Of course I think we know what your broker will tell you. These days you can start trading live with $100, some brokers require even less. Sounds great, right?
Not so fast.
Your broker isn’t going to ask you this next question, because this question is something that most traders don’t even ask themselves before they open a live account.
How much profit is meaningful to you?
Don’t worry about how much you need to pay the bills every month. That’ll come later. For now the most important thing you can do is to figure out that magic number that makes it worthwhile for you to sometimes wait days to find that A+ setup.
What I Recommend
Although you can start trading live with a very small amount, I don’t recommend it. By small amount I mean less than $1,000. That is the bare minimum in my opinion but ideally you should have at least $5,000 to start with.
The reason being that with a small account you won’t be able to make enough on each trade for it to be psychologically meaningful to you. We all know trading price action on the higher time frame requires patience and lots of it. So what happens when you sit on your hands for three days only to make $40 or $50 when a trade goes your way? It can be frustrating depending on how you value money.
Although the trade went your way and you’re happy about that, there’s something missing. That something is the sizable trophy (profit) for being so patient and disciplined.
But it gets worse. Now you feel that in order to grow our account to a point where a profitable trade is substantial enough, you need to trade more often. And therein lies the problem. So you start looking for trade setups on lower time frames or worse, you start convincing yourself of setups that aren’t really there. This of course leads to losses and before you know it not only is your profit gone but so is your confidence.
The flip side to this is that you start risking far too much money per trade. You start risking 5, 6 or even 8 percent just to quickly grow your account to a point where a profitable trade is worth the wait.
Doing the Math
A good way to figure out what that magic number is for you is to ask yourself this simple question – what does a substantial profit look like to me? Is it $100, $200 or maybe $500 or more. Once you know the answer you simply reverse engineer the numbers to figure out what your starting account balance should be.
So if you need $200 for a profitable trade to feel meaningful, and you’re comfortable risking about 2% per trade, then you’ll need at least $5,000. At 2% you’re risking $100 per trade which means your potential profit is $200 when applying the 2R minimum.
This is one of the most important exercises you can do before going live and unfortunately it’s also one of the most overlooked. Traders are too hung up on those “compound” spreadsheets where you enter your starting balance and profit % per month and it spits out how fast you can become a millionaire. Most people inevitably enter a few hundred bucks, or maybe $1,000 and then they’re convinced that they can be a millionaire in 2 years.
If only it were that easy…
What they’re forgetting is that the journey has to start somewhere. But instead they’re only focused on that million dollar mark and how great their life will be when they reach it.
But how satisfied do you think they will be when their first profitable trade nets them $20? Will they have the patience to wait three days for the next opportunity?
Think about it this way. If you have a $50,000 account and you risk 2% on a trade you have $1,000 at risk. Now let’s say you profit from a 3.5R trade (which is very doable). You just made $3,500.
After making more than $3,000 are you going to feel overly pressured to jump back in the market to make more money? Probably not. Instead you’re going to be thinking defensively. You want to protect that money you just made.
That is the key to becoming profitable – developing a defensive mindset rather than an offensive one. In other words protecting your profits. And that’s extremely hard to do when your profits are meaningless to you. Because instead of thinking, “I need to protect this money I just made” you think, “eh…it’s only $20”.
That’s it for this lesson. Hopefully these concepts have shed some light on the controversial topic of how much money you really need to start trading Forex live. Again, it’s a very personal decision that only you can answer but it’s one that is critical to your success as a trader.
If you take nothing else away from this lesson just please do me this one favor…stay away from those compound spreadsheets.