This week’s question comes from Bode, who asks:
Can a Forex trader with initial capital of $500 trade on the daily time frame successfully?
This is one of the more common questions I receive each month. There is this misconception that to trade the daily time frame you need a large account.
Thanks to micro accounts, this is no longer the case. But just because you can do something doesn’t mean you should.
In today’s post we’ll discuss the use of micro accounts, but more importantly, we’ll focus on other psychological factors that come into play when deciding how much money you need.
The Advent of Micro Accounts
There are three common types of accounts in the Forex market. The first is a standard account which is usually reserved for larger traders. The second is called a mini account and is for intermediate traders.
The third is a micro account. As the name suggests, this is the smallest of the three where each contract is just 1,000 units of the base currency.
The name of each corresponds to the size of the “lots” that are commonly used. Let’s break down each account type now before we move on.
- Standard lot – One contract equals 100,000 units of the base currency
- Mini lot – One contract equals 10,000 units of the base currency
- Micro lot – One contract equals 1,000 units of the base currency
From the information above, you can see that a micro lot is 1/100th the size of a standard lot. Because of this, you can trade the daily time frame with a 100 or even 200 pip stop loss without needing a lot of money.
For example, let’s say you want to short the NZDUSD with your micro account. When selling 1,000 units, the value of 1 pip is just 10 cents ($0.10). So even with a 70 pip stop loss, you’re only risking $7.
So the question above was whether or not a trader can start with $500 on the daily time frame. As you can see, the answer is an unequivocal yes.
Now, whether you can do it successfully – as stated in the question above – is another matter entirely. But you can certainly trade a higher time frame with a $500 account and still maintain proper risk control.
Before we move on, feel free to post your preferred micro account broker in the comments below. It’d be nice to get a list going for those looking for their first Forex broker or perhaps making the transition to a new one.
How Much Do YOU Need?
So now that you know you don’t need $10,000 to trade the daily charts, the question is no longer how much does someone need?
It’s how much do YOU need to trade the daily time frame?
You see, every person is different and therefore has various needs, expectations, etc. For some, starting with just a few hundred bucks may be enough. For others, a more substantial amount may be necessary.
To help you find the answer, let me pose a hypothetical scenario.
Let’s say that after reading this post you decide to open a micro account with a broker. You deposit $500 and begin looking for your first trade.
The very next day you come across a bullish pin bar that has formed on the USDJPY daily chart. It’s with the trend, at key support and offers a two to one profit to loss ratio, so you decide to pull the trigger.
Three days later the pair hits your target, and you’re out with your very first profit using the daily chart.
Overcome with excitement you head over to your trading platform to check out your newly minted money.
But that excitement doesn’t last long. Because you risked 2% of your account balance, it means that your profit, which was twice your risk, is just $20.
In a perfect world, you should be 100% content with that. After all, you just added 4% to your account. Most traders would be thrilled to make that in a month much less a few days.
Also, as I always say, you should focus on the process of becoming successful rather than the profits. Consistent profits in any financial market are just the byproduct of a well-established process.
But let’s face it, we’re all human. No matter how hard you try, there will be an irresistible temptation to make money, especially if you’re relatively new to trading.
While that may seem like a harmless notion, if you’re only making $10 to $20 per profitable trade, it’s going to be particularly challenging for you to control the temptation to overtrade.
In other words, if the profit from a “good” trade is not psychologically meaningful to you, you’re at a greater risk of forcing trades in the near-future. And ask any trader who has been down that path, and they’ll tell you that it never ends well.
To drive this point home, let’s run through the same example only this time we’ll use a $10,000 account.
A 4% gain on $10,000 is $400. While it won’t buy you a Ferrari, it’s safe to say that you would be more than satisfied to see that kind of profit post to your account.
It’s the same 4% gain as before, but psychologically it has greater value.
You can probably see where I’m going with this.
The trader who makes $20 is arguably more likely to want to trade right away as opposed to the trader who makes $400 from a single trade. Of course, there are no hard and fast rules here and it’s all relative, but that $400 is more likely to keep you satisfied for a longer period than the $20 gain.
At the end of the day, there is no single correct answer to how much money you need to trade the daily time frame. It’s a question that only you can answer as it’s relative to your individual needs and current financial situation.
The most important thing when deciding is to consider your risk tolerance as well as the amount you deem to be psychologically meaningful. That goes for both profits and losses.
No Risk Capital, No Trading
Before making any decisions about what size account you need, you should ask yourself this one question.
How much can I afford to lose?
I don’t mean how much you can lose on a single trade; I’m talking about losing the entire account.
Any money you deposit into a Forex trading account needs to be 100% disposable. If it isn’t, you’re likely to get yourself in a lot of trouble.
So if you begin with $500, just be sure you don’t need that money for rent, food or any other necessities in life. It should be money you can afford to lose.
If you don’t have any disposable income right now, my suggestion is to stay with a demo account. Attempting to trade a real account with money you need to survive is one of the quickest ways to blow the entire sum.
The same goes for the trader who begins with $10,000. While the goal is to build the account into $20,000, $30,000 and so on, that shouldn’t be your base case.
As traders, we need to be on the defensive at all times. That goes for everything from choosing your starting account size to the position size of a single trade.
It all begins and ends with a defensive mindset.
The advent of the micro Forex account makes it possible to trade the daily time frame with just a few hundred dollars.
However, one of the most important questions when choosing a starting balance is how much money do YOU need? What is a meaningful amount to you?
Even more significant than that is how much can you afford to lose if the entire account gets wiped out?
Every dollar you deposit into a Forex account should be 100% disposable and therefore not needed to pay for any of life’s expenses.
Otherwise, you’ll expose yourself to levels of stress and anxiety too great to overcome. So stay defensive and only trade with money you can afford to lose.
Your Turn: Ask Justin Anything
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
- Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
- Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.