Like all businesses, trading in Forex also requires capital. The big advantage in forex trading is that there is no legal minimum amount required for trading and you can start with very small capital. You can start with an amount as small as $1 as quite a few trading accounts require that as a minimum deposit. But should you start trading with just $1? Here are the pros and cons of it:
Trading with a forex broker
If you are trading with an institution like a bank or a money changer then the minimum deposit will be high. However, the story is different with a forex broker.
- Minimum deposit amount
The minimum deposit amount for most forex brokers is much lower than the banks. Normally it is around $100, but quite a few brokers offer a bare minimum deposit. With them, you can start trading with as little as $1. However, this may sound lucrative but trading with such small amounts comes with its problems.
- Minimum position size and maximum leverage
Forex is generally traded in micro (1000 units), mini (10,000 units), and standard lots (100,000 units).Most forex brokers won’t allow you to trade smaller than 1 micro lot. A micro lot is 0.01 of a normal lot and is worth 1,000 units of the base currency. So, to trade in a micro lot of USD/JPY pair you need to deposit $1000 (as 1000 units of the base currency). The leverage offered by brokers is usually in the range of 30:1 or 50: 1 on your trade and that will allow you to trade in one unit of USD with a deposit of $33.34 or $20.
Some brokers also allow trading position sizes smaller than 1 micro lot. The nano lot (equal to 0.001 lots) will require you to deposit $100 for the same currency pair of USD/JPY. So, 1 nano lot equals $100 and with a leverage of 100:1, this trade will require $1 only.
Should you start trading with a bare minimum amount?
When you start trading with a deposit of $1, you are wasting your time as you can’t do much with this minuscule amount. There are several reasons for this –
- Managing risk
As the forex market moves in pips which for most currency pairs is equivalent to 0.0001 or 1/100th of a percent. To take an example – a pip move will mean a currency pair changing from 1.3025 to 1.3026. You can calculate how small the charge would mean for $1! Even if you consider that you are in profit then the time it would take to generate a respectable return will be huge. So, in reality, the return for an investment of a small amount will be small.
As a day trader, you should not risk more than 1% of your account on a trade. So, for an amount of $100, you should risk $1 and similarly, the return will be minuscule.
- Withholding interest
Think what excites you – earning less than a Doller or a couple of hundreds! This becomes important in the long run as a steady respectable earning will help you to consider trading seriously and help you stick to it.
Opening a Demo account
If you are new to trading, it is better to open a demo account. Most of them don’t require any deposit so you can start trading for free. The advantages of a demo account are many –
- This account has the same tools and will allow you access to the same markets.
- It will help you to know the market as well as the tools and trading platform and how they work.
- It will help you to learn the tricks of the trade.
- It will help you to practice and refine your trading plan
- You can earn an amount for some serious investment in the market
So, what can be the minimum investment?
It is better to invest seriously after you have acquired some knowledge of the market and the trade. The capital you want to invest in trading is entirely your choice but the minimum should be 100 $/£/€ .
Remember that the old saying “money makes money” is true for this trade too.