Many brokers offer a lot of options when it comes to opening accounts with them. All these accounts require a minimum account balance. The minimum that is generally offered by many brokers is $5 (with Hotforex
, FXPesa Kenya
& XM Trading) but we recommend that it would be better to open a trading account with a minimum of $500. This would ensure that a sizeable position could be taken in trading and a good profit could be earned on positive market movements.
However, it should be kept in mind that a position would depend on the balance maintained and the leverage offered by the broker. It is generally advised that a day trader shouldn’t risk more than 1% of their forex account on a single trade. That means, if your account contains $500, one should not risk more than $5 per trade. Trading positions also depend on the lot size that one opts for. One can trade in Standard lots (100,000 units), Mini lots (10,000 units) or Micro lots (1000 units). If USD is listed second in the currency pair, like EUR/USD or AUD/USD, and your account is being funded in USD, the value of pip per lot type is fixed. Hence, value of one pip for a Micro lot, a Mini lot and a Standard lot is $0.1, $1 and $10 respectively. Knowing this information is very helpful as this would help in determining the level of risk one can take and what position to take in the trades.
Let us assume we have $500 in our account and would like to trade on Mini lots for EUR/USD, currently at 1.084. The broker offers a leverage of 100:1 and 0.4 pips in spread for the EUR/USD pair. One Mini lot of EUR/USD can be bought with $108.4 of capital (1 Mini lot = 10,000 units * $1.084 = $10840 / 100 leverage = $108.40). With $500 in account, we take up a position of 40000 units or 4 Mini lots of EUR/USD pair, resulting in total capital invested be $433.6. With a positive movement of 1 pip in EUR/USD, we would gain $1 per lot. Hence, the total gain on our position would be $4. From this, we reduce the broker’s spread of 0.4 pips per lot to reach out net profit of $2.4 on our position of 40,000 units.
Starting out with a moderate amount of capital like $500 gives you the flexibility to trade as trading with very low capital & using high leverage is very risky. Generally, the very liquid forex pairs have changes in the range of 100 of pips. So, one can generate a good return if you invest wisely with low leverage. However, the risk appetite should also be kept in mind.