Many individuals who are interested in trading the financial markets believe it is necessary to have a large amount of investable capital to get started. While it’s possible to start trading with a small capital, small-time traders often don’t generate a lot of return on investment. Furthermore, trading with a very small account requires very strict risk management techniques. There’s not much room for mistakes or any unwanted losses. For example, if the starting capital is $500 and the trader incurs a loss of $600, then the account will immediately become untradeable until more money is deposited into the account.
Is Forex Trading With a Small Account Even Possible?
Trading with a small capital is possible but there are rules that you should follow at all times. If you do start with a large account, then you’re automatically buffered against mistakes and even unexpected losing streaks. Small accounts, on the other hand, don’t have such a buffer, which may make the trader more cautious when it comes to putting on trades and could lead to traders closing out trades prematurely if they are going against them.
For Traders With Small Accounts, Start Trading Using Leverage
When you trade using leverage, it allows traders using a small account to trade markets by borrowing money from the broker to put on the trade. By borrowing from your online broker, you can, for example, move $10,000 worth of a stock by only investing $200 as the initial capital. This would be an example of 50:1 leverage. Hence, if the stock then goes up by 1%, the trade generates a revenue of $100, which is a 50% profit on the leveraged trade.
Leverage trading is, therefore, very popular in forex trading where traders aim to make profits from small movements in currency pairs and enables small trader with little capital to trade the currency markets.
Stick to the 1% Risk Rule
The 1% risk rule states that you should set the loss threshold of any one particular trade to 1% or less of your total investable capital.
When you trade in adherence with this rule, it provides small account traders with the same buffer to those who are trading with a large account. There are even many veterans and professional traders who still abide by the 1% risk rule even though they’re now trading with a large account. That is because it’s a very effective money management technique that’s almost devoid of any additional risk.
The Challenges of Trading With a Small Account
Trading using leverage carries more risk than trading without leverage. This needs to be taken into consideration when trading with a small amount of capital. Placing too many risky trades can easily lead to a loss of your entire investable capital so it is important to play it smart and stick to safer trades that have a higher chance of generating a profit.
Forex education can help improve the success of trading with both large or small accounts. By developing your knowledge about the foreign exchange market, you increase the likelihood of being a profitable trader in the long run.