There might be numerous reasons for someone to start trading with small capital even if he or she could afford to begin with a larger sum. Getting the feel of live trading is often an exciting but costly endeavor. Having the opportunity to trade small gives you a great head start to overcome the inevitable mistakes that a new trader makes. Although demo trading helps, live trading is a different class. Psychologically it is a whole other dimension and that is true even with the smallest amounts not to mention if you trade with a significant part of your wealth.
Nowadays, it is possible to start trading literally with no money with the help of some of the account opening bonuses that are available. While these promotions are often subject to conditions they can offer great value for the novice trader.
Mini accounts, high leverage, and the said bonuses mean that if you want to open an account with $1000, $500, or even $100 dollars you won’t have a problem with the right broker. It’s hard to say that what is the ideal amount of capital to start with, so let’s look at the main issues that can come up with small accounts!
The role of leverage
Probably the biggest question is how to handle leverage. With small amounts and high leverage even the smallest mistake can cause your account to go to zero. Why? If you do the math with 50:1 leverage and full position it takes a movement of 2% to wipe out your capital. And 50:1 is not the highest available margin by far. The same calculation leads to 1% with 100:1 and 0.1% in the case of 1000:1 that is still available at some companies.
That’s not to say that leverage is bad—it can be a really useful with certain strategies, but traders, especially beginners, need to understand the limitations of leverage besides the opportunities. Even with successful strategies, you can get wiped out easily when using leverage as it magnifies moves, for example, price spikes around news announcements.
Dedicated accounts for small sums
The first thing you need to know when you plan to open a small account is the minimum trading size that a broker offers. To understand that, you should know that a “normal” size in forex trading is $100,000 (or 1 lot as it is often referred to). Commissions, fees, and bonuses are determined by “lots traded” in a lot of cases.
Now, luckily, this doesn’t mean that you have to trade with at least $100,000. Most traders offer smaller sizes as low as $100. For most strategies the minimum amount of $1000 should be enough, as that means a 10:1 leverage even if you start trading with just $100. That is manageable when trading currencies as a 10% move (which would mean you get wiped out) is a massive move in forex.
Sometimes there are so-called “mini accounts” offered by brokers. These can be really helpful not just because of small sizes but equally small costs and commissions.
So this should be the first condition when choosing a broker—to be able to trade small.
Commissions and fees
It is easy to understand that if you have the opportunity to trade small but fees are much higher in contrast to “normal” trades, you will have a much harder time to be profitable. So, be aware of fixed commissions or minimum commissions/trade—they might be unrealistically high for small sizes.
The same goes for account maintenance fees. There are many brokers without such costs so try to choose between them, otherwise, your account will suffer from the relatively high fees.
Now that you know what to look for here some brokers that we at FXUniversal would recommend for traders who want or have to start with forex with a small amount.
How to trade with limited capital?
The next thing to decide is what strategy to follow with a small account. There is no perfect answer to that but generally speaking, higher risk strategies work better with small amounts. Why? It’s because of the relative costs of trading and holding positions.
Taking higher risks doesn’t mean risking your capital without limits. It only means that your trades will be, more concentrated than they would be in the case of a bigger, more diversified account. This is just common sense as you simply don’t have the choice to have multiple positions if you only trade with $100 or $1000.
The obvious approach is to use technical analysis for day trading or scalping positions. Short-term trades give you the flexibility to avoid major news releases with unwanted consequences or on the contrary trade them intentionally. The crucial thing is that you should trade consciously meaning you need to apply stop losses and be disciplined about them—you can’t afford the luxury of letting your losers run (you shouldn’t do that at all even if you have a lot of capital…).
The good thing is that if you succeed with a small account you are more than likely to be profitable later on. This is why it can be a good idea to start with less capital than you could afford and if you are successful with that take the next step and raise your account.
We at FXUniversal believe that it is possible to be successful with mini-position, but let us know what your thoughts are on small accounts and sizes, and how do you trade with limited capital!