As online financial ventures go, Forex trading is a popular option, and for good reason: it gives retail investors the opportunity to gain access to global financial markets as a result of limited restrictions. For example, there is no legal requirement for a minimum account balance, making it easier for investors of all financial standings to gain a foothold. Before you jump straight in and set up an account, you would be wise to take these factors into account.
Brokers and Commissions
As in any profession, there are experienced brokers and less experienced brokers, and the chasm between the two can make a notable difference to your trading experience. The main thing to be aware of in the world of brokerage is the three basic commission structures that dictate what portion of your earnings goes to your broker. A commission fee of one dollar per $100,000 bought or sold is a good standard rule of thumb, but this can vary based on how your chosen broker charges commission. This is typically based on a fixed spread, a variable spread, or a percentage of the spread, the spread being the difference between the price at which you can buy the currency and the amount you can earn for buying the currency.
The amount of start-up capital you need to enter the trading market depends on how much you want to invest and, indirectly, on how much you want to make. As a general rule, more substantial investments protect investors from the risk of losing the entirety of their deposit in the first transaction, and there is no maximum. At the other end of the scale, most brokers impose a minimum deposit amount, which typically ranges from $10 to $500, and will disallow you from trading with real money until this requirement is met; however, recent history has seen an increase in brokers allowing entry for discounted deposits as low as one dollar. When choosing a broker, make a point of checking the minimum deposit requirement, minimum trade position size and maximum leverage, as these factors can vary widely amongst providers.
An investment strategy can have a significant impact on the parameters which apply to your trading experience. Medium and long-term strategies demand a fairly significant deposit which leaves room to wait for potential drawdowns. Alternatively, if you’re keen on short-term outcomes, intraday trading generally requires a relatively small deposit of between $300 and $500. Strategizing aside, the most important rule for those who are new to Forex trading is to stick to buying the minimum lots and aim to keep the loss limit at or below one percent of the deposit amount, as this will protect you from excessive losses while you are establishing yourself.
Leverage accounts have ultimately made Forex trading accessible on a global scale and made it possible to magnify returns, and the vast majority of brokers will consider leverage an essential component of any trade made with a deposit worth less than one micro lot. The trouble is that for all the additional opportunities available to traders who buy into leveraged accounts, there is also a significantly increased risk profile, particularly for those who fail to understand the role of leverage in the context of trading strategy. For this reason, most traders would be wise to stand by the one percent rule; for example, with an account size of $100, only $1 should be risked on each trade.
It’s important to consider factors like your income level, experience and motivations for trading in order to ensure that you don’t put more on the table than what you are prepared to lose. It may be common for beginners to risk up to 10% of their annual income, but reducing this risk could be a wise move for those on relatively restrictive pay packages. Risks aside, the big question is how much you hope to make from your foray into Forex trading once you are experienced enough. If you’re chasing a replacement or solid supplement for your regular income, you’ll need to make an initial deposit of approximately $5,000 so that you have enough skin in the game to warrant substantial returns.
Like the vast majority of investment prospects, Forex trading is generally a divisive prospect with the potential for mixed results. The most important consideration for prospective investors is whether you have the time, money, and risk management abilities needed to maximize your chances of success in this arena.