There’s a lot to figure out once you make the decision to become a forex trader. What broker to use, when and how to trade, and managing risk is just the tip of the iceberg. One question that many beginners actually find themselves struggling with involves figuring out how much money to initially deposit into their trading account and how much they should risk on each trade from there.
Making an Initial Deposit
There are a few advantages to making both smaller and larger initial deposits. Fortunately, most forex brokers offer different account types that can appeal to traders that are looking to deposit different ranges of money, so you shouldn’t feel pressured to deposit hundreds of dollars if you don’t want to.
Most brokers do offer cheaper account types for beginners, so this is definitely an option if you aren’t comfortable depositing a larger amount of money at first. Plus, you can always go back and deposit more money later on. Here are the perks to making a smaller first deposit of around $10 – $100:
- You can open a micro/mini/cent account, which allows for smaller lot sizes to be traded, making them good starter accounts.
- You can test the broker’s deposit methods and conditions without putting a lot of money on the line.
- If you aren’t comfortable making a bigger deposit, this will allow you to become more familiar with the broker’s conditions so that you can deposit more later on.
- This is a good way to get started trading with minimal risk and makes opening a trading account more of a realistic option for more timid beginners.
While a smaller deposit might be a better option for beginners, there are also a few disadvantages to consider:
- Account types that accept smaller deposits typically come with higher spreads and fees, so you’ll wind up bringing home less of your profits.
- Some brokers don’t allow mini/micro/cent account holders to partake in promotional opportunities and you might miss out on other perks.
- Your small deposit won’t be enough to trade with for a long period of time, meaning that you’ll need to top up your account more often if you run out of funds.
Perhaps you’re leaning in the opposite direction and considering that you should make a larger deposit of a few hundred or thousand dollars. As long as you’ve done your research and chosen a trustworthy broker, then this can be a great decision that offers several benefits:
- Making a larger initial deposit will open the door to better account types that offer tighter spreads and lower commission charges through most brokers.
- Some brokers offer special perks on these better account types, like fee-free withdrawals, larger bonuses, and more.
- Your deposit should provide you with enough money to trade for quite a while without needing to turn around and deposit more money quickly.
A Quick Tip
There’s one important thing to remember as a trader: you should never deposit more money than you can personally afford. Larger deposits may come with more benefits, however, there’s no reason to put yourself into debt when it’s possible to open a trading account with less than $100 through several online brokers. There is no guarantee you will get that money back, so don’t pull out of money that is meant to be spent on groceries, bills, or other necessities. Having the discipline and financial wisdom to only risk what you can afford is one of many qualities that are necessary if you want to be a successful trader.
Conclusion: How Much to Risk?
You probably have an idea of whether you’re looking to invest a small or large amount of money at this point, but there’s still another question left to answer: How much will you risk on each trade? This is really more of a personal decision, but there are a few things you should know before you decide:
- Some of the most common beginner mistakes involve risking too much on each trade, trading with too high of a leverage, and failing to take precautions to minimize risk.
- The more you risk, the faster you could drain your account, especially in the beginning.
- Experts actually recommend risking around 1% of your total account balance on each trade. If you have $100 in your trading account, this means you’d only risk $1 per trade.
Perhaps you wanted to risk a larger amount of money so that you could profit more quickly. One professional tip states that you should calculate the risk you should take based on your confidence in each individual trade. For example, you could stick with the 1% account balance rule on trades that you’re only fairly confident about, but risk slightly more on trades that you feel much more confident about. This will allow you to make slightly larger profits while remaining careful. Of course, this is only a suggestion, so you may want to look for other tips online if you’re looking to do things differently.
At the end of the day, only you can decide how much to deposit and risk based on your personal financial situation. However, there is one rule you should always follow: never invest or risk more money than you’re willing to lose.