As a forex exchange trader or investor, choosing the right amount of capital can be extremely challenging. From your trading budget and risk appetite to the nature of your trading platform, there are many factors to consider while deciding how much you’re willing to risk in the financial markets. Fortunately, we have researched for you, and in this article, you’ll learn the 5 tips that will help you choose the optimum trading capital for you.
Consider your overall budget
Before deciding how much to trade with, you need to define how much you have in your monthly or yearly budget. This helps you set aside enough funds to cater to your basic needs before taking out a percentage of your earnings for trading forex. Choosing a trading capital that is compatible with your budget also helps to strengthen your trading psychology and avoid the trading errors associated with the fear of losing trades. When traders trade with too much capital, they get emotionally attached to the results of each transaction instead of evaluating themselves based on the results after a series of trades. Make sure you’re trading with a portion of your income that you can afford to lose.
This percentage should be an amount you can lose and still live your life to the fullest without financial instability.
Match your capital to your trading style
Your style of trading should influence the amount you decide to invest as a trader. Some trading styles are capital-intensive and require more capital to work. For instance, traders who love to trade with conservative and larger stop losses are likely to lose more money compared to traders with smaller stop losses. If your strategy is characterized by a lot of drawdowns, you may increase your trading capital to create a buffer. Some swing traders endure long-term drawdowns before realizing profits in the forex market. In this instance, their capital sizes must be large enough to absorb the effects of such drawdown.
Evaluate your trading goals
Before starting forex trading, you should have trading goals that you want to achieve in a specific time period.
If you wish to make a significant amount of returns, then you should consider trading with a substantial amount of capital. Trying to make a million dollars from a hundred dollars would be an unrealistic goal, especially for a new trader. Make sure your profit targets match the amount of capital that you’re willing to invest.
Full-time traders who trade for a living are also encouraged to trade with enough capital to meet their needs. Part-time traders, however, are likely to trade with little capital. If you’re trading with automated systems, then your results and percentage gains would depend on how much capital you’ve invested. Ensure that the amount you’ve invested can realistically produce the results you’re expecting.
Determine your risk appetite
Based on the amount of risk per trade, there are two types of traders; conservative and aggressive.
Conservative traders often trade with low risk and may execute fewer trades than aggressive traders. If you’re an aggressive trader who uses a significant percentage of capital per trade, then make sure you have enough capital to absorb losing streaks if they occur. Your style of trading also affects the percentage of your budget that you would set aside to trade with.
Consider the trading conditions
Brokerage platforms have different requirements in terms of leverage, margin, and spread. The amount you’ll deposit should be sufficient to facilitate trades with the leverage you’ve chosen. Traders who use high leverage often require less capital because leverage allows you to borrow funds from your broker, meaning that you’ll increase the buying power of your funds. You can tailor your leverage to meet your trading needs and requirements. However, new traders are encouraged to trade with low leverage and risk between 0.5%-1% of their capital per trade.
Pro Tip
If you don’t have enough money to trade with, it would be great if you considered prop trading. Many reliable and regulated prop firms would give you trading capital in exchange for a portion of your profits.