Access to leverage, the availability of services of large brokers, the widespread dissemination of trading systems that promise wealth to everyone and everyone – all this continuously contributes to the promotion of trading on the Forex market to the masses.
However, it is important to understand that the amount of capital available to a trader directly affects his ability to earn a living by trading in the foreign exchange market. In fact, the role of capital in foreign exchange trading is so great that even a slight increase in it can lead to a significant increase in profits. This fact is explained by the fact that if there are additional funds, the trader can use larger positions and more often carry out trading operations.
The ability of a trader to effectively use the real opportunities that arise in the market is exactly what distinguishes a professional from a beginner. Among other factors allowing these opportunities to be used, one of the dominant roles is capital adequacy and the formation of a trading system. So how much money does a trader need? It depends on your goals and, first of all, on their realism (More detailed information on this topic can be found in the Forex article. Development of a trading strategy.)
Acceptable profitability indicators.
Each trader dreams of becoming a millionaire using a small starting capital, but real cases such a success can be counted on the fingers. While professional traders accumulate and increase profits, small traders are constantly under stress due to the use of excessive leverage and increased risks in the hope of an early increase in their funds. They believe that they can double, triple or even quadruple their capital in a year, although, as practice shows, the annual capital gain of a professional fund manager does not exceed 15%.
In practice, taking into account commissions and spreads, a trader needs to be successful just to reach a breakeven point. Let us give an example of operations with an E-mini contract. Suppose that the commission for conducting an operation with one contract is $ 5, and a trader carries out 10 such operations daily.
Accordingly, for a 21 working day (calendar month), a trader spends $ 1050 only on commissions, excluding expenses for other paid services (Internet, permission to trade, providing schedules, etc.), necessary for trading. In this example, if the initial capital of the trader is $ 50,000, he will spend 2% of its amount only on commissions. And if we take into account slippage, the trader will spend another $ 12.5 in half the transactions, which is $ 1312.5 per month.
Thus, the trader’s expenses on trading operations will amount to $ 2362.5 (about 5% of his starting capital), which he will have to cover through successful trading.
A realistic view of commissions
If you consider commissions from the above point of view, making a profit is a rather difficult task for a trader. However, if the trader has sufficient capital, the solution to this problem is greatly simplified and the trade turns from unprofitable to profitable. Suppose that a trader, despite the presence of loss-making transactions, earns an average of 1 point per trade, then the trader’s income will be:
210 trading operations x 12.50 $ = $ 2625 minus commissions ($ 5 per trade):
2625 – 1050 = $ 1575, or 3% per month of the amount of the initial capital.
The average profit of 1 point covers all commissions related to slippage and brings a profit exceeding the profit in many indices. Despite this, an average profit of only 1 tick is an unattainable task, especially for beginners who dream of super-profitable transactions that bring millions.
Is your capital sufficient?
It would seem that there is nothing simpler than an average profit of 1 point, however, according to statistics, most traders fail. A guaranteed 1 point of profit would allow small traders to use all their capital when opening transactions and receive up to 15% of profit every month.
Unfortunately, small accounts are more affected by commissions and slippage, which significantly reduces the chances of a successful trade. In addition, the owner of a large account can use the enlarged positions to benefit from intraday trading. The holder of a small account is not able to use large positions, as this may lead to a margin call. Trading one contract 10 times a day with a goal of 1 point can make a profit, but at the same time it is a source of increased commissions, so a trader is unlikely to survive in the market using a similar strategy. An account that allows you to trade not just one, but 5 contracts, not only increase the trader’s profit by 5 times but also reduces risks by 5 times.
There are no rules determining the optimal volume of transactions or the number of trading operations that contribute to profit. Each trader must analyze their own average profitability in order to determine the volume and frequency of transactions necessary to achieve a certain level of profit. In this case, the trader should, first of all, focus on an acceptable level of risk for him.
The use of leverage significantly increases the amount of potential profit, but at the same time, it is a source of increased risk. Unfortunately, since many traders mismanage their accounts, the benefits of leverage rarely seen in practice. Leverage allows a trader to use borrowed capital to open larger positions, which often leads to a loss of initial capital.
When using leverage, traders must adhere to the rules of money management and not risk more than 1% of their capital. However, as practice shows, traders often violate the rules for managing funds in conditions of insufficient capital. This phenomenon is most common in the Forex market, where traders can manage capital, which is 50-400 times their personal funds.
For example, a trader who has deposited $ 1000 and uses a leverage of 1: 100 can manage up to $ 100,000 in the market. In the case of using a large amount in a volatile market, the trader has to closely place the stops, which the market often absorbs. On the other hand, limiting the risk to 1% of equity ($ 10 from $ 1,000) through the use of micro-lots allows the trader to feel quite comfortable and make informed trading decisions.
Traders need to avoid the temptation to quickly turn their $ 1,000 into $ 2,000. Double the capital is indeed possible, however, for this, it is necessary to focus on long-term prospects and strictly adhere to the rules of risk management.
If a trader carries out 10 transactions a day with an average profit of 5 points, his daily income will be $ 5 (for a micro lot) or 0.5%. After accumulating a sufficient amount of capital, the trader will be able to cover all expenses and begin to make a profit. Attempting to make significant profits with insufficient capital entails increased risks and large losses.
Often, traders do not realize that even a small average profit, for example, 1 point, can bring a significant percentage increase in capital. Most traders enter the market with insufficient capital, as a result of which they take increased risks since they do not adhere to the 1% rule. The use of leverage is certainly beneficial for the trader since he gets access to a market with high capital requirements, however, the rules of money management should not be neglected and the threshold for using own funds should be exceeded 1%.