Forex Trading: How Much Starting Capital Do You Need?

There are many questions that crowd the minds of those who aspire to operate in Forex Trading. After all, this activity is very complicated, and for an absolute beginner it can be difficult to unravel the doubts before making their debut in the market. Among these questions, one stands out: with what capital should you start? Answering this question is more complicated than you think, partly because the perhaps most obvious answer is not the exact one. Obviously, a beginner who is afraid of making mistakes and losing their money would say: it's better to start with the minimum possible! Well, in the vast majority of cases, this is a mistake that can lead - even in the short term - to really bad consequences, up to failing the main objective: becoming a professional trader.

The Minimum Capital

In reality, today Forex Trading is an activity within everyone's reach. By this, we don't mean that it's easy to earn money, quite the contrary. Very simply, most brokers allow you to open an account with trivial amounts that everyone can afford to spend. Just to give an idea, the minimum initial deposit imposed by some brokers is equal to or less than 200 euros. Based on these numbers, everyone can become a trader, or at least hope to become one: from the worker to the employee, from the student to the unemployed, if they have set aside a minimum nest egg, or have the opportunity to borrow the money. Obviously, as already specified, this is all potential. To become professional traders, study, hard work, willingness to learn, and even a fair dose of intelligence are necessary. Not to mention the moral and psychological qualities, without which it is impossible to succeed in trading. Certainly, the vision behind such low initial minimum deposits is clear. Brokers as a whole, in fact, aim to conquer a new clientele, namely that formed by the uninitiated. The intent is to open Forex Trading to the common people. A noble intent, especially when accompanied by transparent advertising messages that don't promise the moon, and training paths designed specifically for beginners. Unfortunately, starting with such low capital, that is, with the minimum deposit allowed by brokers, is not exactly a good idea. Sure, some traders manage to generate (in the long or very long term) excellent results even starting from such low capital. However, in general, you need to aim for the ideal capital, rather than the minimum capital.

The Ideal Capital

What is meant by ideal capital? Certainly, it is not the minimum capital, neither from a conceptual nor a numerical point of view. Without venturing for now into the identification of figures, let's present some characteristics that capital must possess to be called "ideal". It must not represent a source of livelihood. If the initial capital is necessary for you to carry on, to maintain your current standard of living or to cope with unforeseen events, it means that it is too high. The capital should correspond to the amount that you can afford to lose without it affecting your lifestyle. It must not be objectively low. What are the risks of starting with low capital? There are many, we will talk about them in-depth in the next paragraph. Meanwhile, we mention one: the inconsistency of earnings, even when excellent trades are made. On average, but this may not apply to everyone, a good starting capital is around 2,000-5,000 euros.

The Risks of Undercapitalization in Trading

Starting with minimum capital, therefore starting from a situation of undercapitalization, can be very risky. In reality, the sense of security or protection drawn from operating with a low stake is illusory. Sure, in the very short term they generate a calming effect, but already after a few trades, high risks with a dramatic impact on hopes of success loom on the horizon. Here are the risks you run if you start with too low capital. Meager earnings. Even before logic, it's a matter of mathematics. Generally, from a trade - when it goes well - it is possible to earn 2%, 3%, 5%. Now, it's one thing to earn 5% of 10,000 euros and another to earn 5% of 100 euros. The first scenario beats the second by 500 euros to 5. Ultimately, if you start from too low a capital, the gains - even assuming things go well - are really too meager. Abuse of financial leverage. This is a consequence of the previous point. If the earnings are minimal, the trader is naturally led to use the tools at their disposal to try to increase their consistency. The most readily available tool is financial leverage. Now, leverage is a powerful tool, but only if handled by expert hands. Otherwise, it can be extremely dangerous. It's true, potential gains are multiplied, but the same exact thing happens with potential losses. In a nutshell, the prospect of total account depletion is not at all unrealistic. Progress not perceived. Finally, a note regarding psychology. The beginner trader needs, in a sense, injections of confidence, events and situations that suggest progress, a path towards improvement. Now, if the gains are minimal, it will seem like toiling for nothing, expending mental and psychological energy for a goal that is too far away. In the end, the eye is captured by absolute numbers, rather than percentages. So a gain of 3 euros will be viewed with little enthusiasm, even if it was the result of a 20% return.

Capital and Security in Forex Trading

Even traders who "get it right" about starting capital are called upon to take specific precautions if they don't want to lose it within a few trades. The main advice, which can be extended to all traders, is to focus on money management, therefore to practice it with intelligence and commitment. It is the only discipline that allows you to keep losses under control, plan a growth path, and counteract the risks to which the market exposes you. A watchful eye, in particular, should be paid to the issue of position sizing, a practice by which it is possible to decide, more or less scientifically, the correct investment, trade after trade. There are numerous sizing techniques. Above all stands out the 2%, which is the maximum percentage (of the total capital) to be invested in a single trade. Another piece of advice is to invest only the money that you can afford to lose. Sure, it may seem pessimistic as a perspective, but it's good to trade with the awareness of being able to lose everything. Now, if that "everything" corresponds only to the account, and not to savings that allow you to live, it is possible to operate with greater peace of mind and risk only relatively catastrophic outcomes. The basic principle is risk containment, and risk containment also passes through reasoning of this type.