How Much You Need To Start Trading Forex

Written by Julie Brownlee on March 18th, 2016

How Much You Need To Start Trading Forex

Forex trading is fast-paced and exciting, so it’s little wonder it appeals to so many people.

Instead of having to dredge through all the companies on the stock market and the research that goes with this, you can trade a handful of currencies.

Not only does this make research much easier, but it allows you to hone your skills to uncovering winning strategies to trade forex.

So if you want to start trading Forex, how much cash do you need to start?

Well, it depends on a number of things.

Let me show you.

 

How To Bank A Second Pay Cheque Using Other Countries Money

 

Before we go any further, let’s have a quick look at what Forex trading is.

It’s all about trading the world’s currencies against each other.

For example, you could trade the rand against the dollar or the euro against the pound.

By trading currencies in pairs, you speculate that one currency will strengthen against the other.

The forex market is the largest and most liquid financial market in the world trading as much as $5trillion a day.

Unlike the world’s stock markets, the forex market is open for trading from very early on a Monday morning straight through until late on a Friday evening.

So how exactly do you start?

 

You Need To Decide Which Currencies To Trade

 

To work out how much you’ll need to begin trading forex, you first need to decide which currencies you’re going to trade.

You have two options…

  1. The rand against a basket of major currencies; or
  2. Different currencies, excluding the rand.

The option you decide here determines the minimum amount you’ll need to start trading.

 

Trading Forex With Futures

 

If you want to try to profit from the rand’s ups and downs against the world’s major currencies, the easiest way to do this is with currency futures.

Currency futures trade on the Johannesburg Stock Exchange’s Currency Derivatives Market.

Which Currencies You Can Trade

You can trade the rand against currencies including:

  • The US dollar
  • The euro
  • The British pound
  • The Japanese yen
  • The New Zealand dollar
  • The Australian dollar
  • The Botswana pula
  • The Chinese renminbi

How To Trade Currency Futures

If you want to trade the rand using currency futures, you need an account with a stockbroker who offers currency derivatives trading.

Your current stockbroker may offer this type of trading; you just need to ask.

Whether this is the case or you need to find a new stockbroker, you’ll have to open up a trading account.

It’s a similar process to opening a normal brokerage account, but you’ll have to sign an agreement stating that you understand the higher risk you’re taking on by trading this product.

How Much You Need To Open A Currency Futures Trading Account

To begin trading, the amount you need to start trading will vary from broker to broker, but you’re looking at a minimum of between R10,000 and R15,000.

You can find different brokers offering currency futures trading by looking here on the JSE’s website.

 

Trading Forex With Spread Trading

 

If you want to trade currencies excluding the rand, the easiest way to do this is with spread trading.

You can spread trade through trading companies such as GT247.com.

Which Currencies You Can Trade

You can trade a wide number of currencies against each other, including:

  • The US dollar
  • The Swiss franc
  • The Japanese yen
  • The British pound
  • The Canadian dollar
  • The Australian dollar

How To Spread Trade Currencies

If you want to spread trade currencies, you need to open up an account with a company offering spread trading.

You’ll need to complete an application form and provide FICA documentation, just as you do when opening an account with a stockbroker.

How Much You Need To Spread Trade

You can open up an account with just R500.

This certainly appears like a much more affordable option to trading currency futures, but the minimum amount to open an account isn’t all that you should think about…

 

Is There An Ideal Amount To Start Trading Forex?

 

By focusing only on minimum amounts, you’re ignoring one of the most important aspects of trading.

What am I talking about?

Risk management.

Instead you should focus on how much you need to trade following a strict risk management strategy.

This will prevent you from losing all your money on a few trades and it’ll stop you taking on too much risk.

So how can you do this?

 

How Much You Should Put Into Each Trade

 

How much you put into each trade is called your position size.

With position sizing, the idea is that you risk small amounts on each trade.

A conservative way to approach trading is to risk 2% per trade.

Using 1% would be more conservative.

Using 3% would naturally be riskier.

With each trade you place, you don’t want to risk more than 2% of your trading pot.

If you want to start off risking R200, you’d need a trading pot of R10,000 to stick to the 2% rule.

So you’d risk R200 on your first trade - This is how much you could potentially lose if your trade hit its stop loss.

You then adjust how much you risk according to the outcome of each trade.

Sticking with our example, if the trade goes your way and you make R200 profit, you now have a pot of R10,200. You’d then risk R204 on your next trade (2% of R10,200).

On the other hand, if the trade doesn’t go your way and you lose R200, you now have R9,800 in your trading pot. You’d then risk R196 (2% of R9,800) on your next trade.

As you win more trades, your trading pot increases and so will what you risk.

This means you’ll start placing larger trades with potentially higher rewards.

Of course, the opposite is also true.

If you’re not performing as well, you’ll risk less.

 




 


 

The Secret To Your Forex Trading Success

 

It all comes down to one thing.

Preparation.

Forex trading is exciting, and it’s understandable why you’d be eager to begin.

But as with most aspects of investing and trading, if you ignore the risk management side of things, you’ll regret it.

Risk management ensures that you won’t blow your trading account in a day or two, and gives you time to hone in on your trading strategy to improve your chances of success.

This includes how much money you need to start trading forex.

Don’t base your trading decisions on how much a company requires you to open an account, you need to consider the bigger picture.

It’s well worth starting off risking small amounts of money.

Not only will you have a long trading future to look forward to, but you’ll be able to keep your emotions at bay as you’re not staking huge amounts of money.

Until then, here’s to profitable trading.

Julie Brownlee | The Money Lab

Julie Brownlee
Editorial Contributor
The Money Lab