Absolutely! With the introduction of micro accounts by forex Brokers several years ago you can now open an account with no cash and start trading with as little as $100. But just because you can doesn’t mean you should. In fact, if you do, I think you’ll find your forex trading experience a very short one.
I personally think the regulators need to step in and get some sanity back in the market place because if you start trading forex with $100 it is simply crazy. Let me explain why?
The forex brokers make money from volume turnover by their clients otherwise known as brokerage fees. They’ll take money from anyone in order to make a buck. They know there are millions of traders out there with $100 and they are all potential clients. So, to get the ‘punters’ in they offer 400:1 Leverage. That means you can ‘fictitiously’ turn your $100 into $4,000 buying power. Which means you can trade 4 lots (or $400,000) with your $100 capital. Sounds awesome right, especially if you don’t have much money. Wrong!!
Brokerage fees and spreads
Let me explain what’s going to happen to your $100 when you trade 4 lots. As soon as you place a trade, you’ll pay approximately $30/40 in brokerage fees, leaving you with $60-70 as collateral. If the market moves against you by 2 pips, you would lose your account balance and your position would be automatically closed out. The market spread for the major currency pairs is on average 0.3-0.5 pips so in fact, if the market moved 1 pip against you your position would be closed out and your account left empty!
Even if you traded 1 lot with your $100 the most you could afford the market to move against you is 6-7 pips. Don’t forget your brokerage costs took the other $30.
Now before you say ‘hey I could trade micro lots’ and last longer. That’s true, you could, but once again how much money are you going to make trading 0.01 lots? If the market moved 100 pips, you’d be up $10. Now that’s not going to make you rich anytime this millennium.
So, to answer the question “Can you start trading forex with $100” the answer is yes, you can, but you sure as hell shouldn’t. You’re basically throwing your money away!
Trading Under Capitalized leads to High risk and high failure rate
This comes back to the biggest reason why most retail traders are not successful, in my opinion, is because they are undercapitalized. With very little cash in your account you don’t even have a chance to build any significant capital. You pay your brokerage fees and then get whipped out of a position before you have time to blink.
If you did manage to survive the first trade, then it may take you 2 years to double the account to $200 trading micro lots. Now I’m sure that’s not part of the plan. The journey for most new traders is they start with $100 then add another $100 then another $100 then $1,000 and then another $1,000 until they bleed their savings account dry.
The smart decision is to invest in yourself and get some proper training or join a funded trader programme and use that company’s capital to trade. You can find several company’s offering funded programs and they usually start from around $100-150. Just be careful and check the programme structure. The last thing you need is paying monthly subscriptions or hidden fees for additional resources.
So how much money do you need to start trading forex?
In my opinion when you start trading forex the minimum starting balance is $10,000. Anything less than that and you are going to be under pressure from Day 1 when you open the account. Now I’m not saying you’re risking the whole $10,000, far from it, in fact you shouldn’t be risking more than 20% of that capital, that’s $2,000, and that’s with an aggressive approach.
Having the $10,000 in the account is to make you relaxed and comfortable and allow you to access some of the leverage available to you.
So, if I’m only risking $2,000 why put in $10,000?
Trading is all about psychology and managing your emotions. If you start with $2,000 and trade the same level of risk as you would with $10,000 in your account you would be thinking every trade, ‘Oh no I’m going to lose all my money’. One bad trade and your close to what we call the ‘back door’, an empty account. You won’t be able to relax and straight away you’re trading from a negative space and trading ‘defensively’ is a recipe for disaster. You’ll be trading not to lose instead of trading to win!
Now if you start with $10,000 in your account you’ll be relaxed and calm. You know your maximum drawdown is $2,000 and the chance of you losing all your cash is close to zero. So, you start trading to make money and you’re not worried about a loss. Confidence is a powerful emotion and will often determine your actions. Trading with confidence is an absolute must.
So how much leverage do I need?
There is no need to trade with anything more than 10:1 leverage. The brokerage firms only set up micro leveraged accounts with 500:1 leverage to sucker people in who only have a small amount of money. The banks and hedge funds would even go close to 10:1 leverage. If you have $10,000 in your trading account, you can trade 1 lot and that’s more than enough to make money with.
If you join a funded trader programme with a $100,000 account, you could trade 10 lots and now you really have the chance to make serious money! A move of 30 pips will net you $3,000 USD and that’s a far cry from trading a micro lot and making $3 USD. So, before you open a brokerage account and fund it with your $100 think of your options.
Be realistic with your expectations
It’s imperative you have realistic expectations before you start trading. Don’t believe the hype that you can turn $100 into $100,000, because it just isn’t going to happen. How much money you deposit into your account plays a major role in how much money you’re going to make and that’s why I say investing $10,000 as a minimum is the way to go. You can double your $10,000 in a matter of 2-6 months with proper capital management and trending markets and that will provide the foundations for a long-term trading career. If you don’t have the $10,000 then I’d suggest you invest your cash in a reputable funded trader programme where you can at least leverage up someone else’s money and trade risk free!