As a new trader, should you begin trading forex with $100? These are some of the observations to consider.
Capital to a forex trader is as crucial as cash flow is to any business. Trading forex is very much like a business, and the money in your account is essentially the oxygen of your trading activities.
The foreign exchange market provides several distinct capital-friendly benefits you cannot find in other prominent derivatives like stocks, futures, and commodities. Because of the substantial leverage brokers afford to traders, it’s become possible to enter the markets with $100 or even $1 and make some profit.
The industry has become more accessible compared to the old days when only banks could trade currencies and often did so with insane lot sizes. This democratization is two-fold because it benefits and disadvantages the average new or experienced retail trader who will probably not afford to start with more than $100.
Hence, you might be wondering should you start trading with this amount? Here’s what you need to know.
Understanding the importance of being sufficiently capitalized
As briefly mentioned, the amount of capital you start with is paramount. Of course, the more capitalized you are, the bigger your gains are compared to someone else trading the same system with less money, but there’s more.
The larger your account is, the less likely you are to over-trade, enforce unfeasible expectations on yourself, plus you can trade a lot more markets and opportunities. Now, if you go through any literature online, people will use terms like ‘large accounts’ or ‘small accounts.’
This terminology makes it difficult for an individual to blur the line between what they should consider a small or large account as it’s dependent on numerous factors. One of the most important is your disposable income, all the money left after paying your living costs, savings, and taxes.
A new trader from America, a country with inherently high living costs, may consider $5000 as ‘too small.’ In contrast, another person from an emerging economy country could perceive the same amount as being more than enough to start.
Ultimately, new traders should consider their individual circumstances and disposable capital as the reference point for what they can realistically afford initially, even if it is only $100. So, although capital is the name of the game, it’s always better to start small based on your disposable income instead of funding much more than this figure.
Advantages of starting forex trading with $100
The main advantage of starting with $100 is your losses should be smaller, meaning they don’t feel as emotionally painful compared to another trader with a more substantial balance. As a new trader getting your feet wet, this does dampen your confidence a lot.
Our psychological wiring dictates we feel far less confident when we’ve taken a big hit in the markets. However, if you’re only starting with $100, you drastically minimize this effect. Also, we could consider $100 as being somewhat affordable for the average person, which is perfect when you’re starting out.
Disadvantages of starting forex trading with $100
Let’s look at the downsides of starting with $100. It’s fair to assume traders in most countries globally consider this figure as small, which psychologically puts you at a disadvantage. Humans have a natural attraction to large numbers from the get-go. Significant available margin and media influences mostly inspire this, which can cause risk management troubles.
Another evident factor is your profits would be lower starting with $100. Moreover, it’s easier to commit the common errors of most new traders, such as over-trading and having unrealistic expectations about their performance.
Another significant problem relates to how many markets you can trade with $100. Most brokers offer standard accounts allowing lot sizes from micro (0.01), mini (0.1) to full (1). Although you can open some positions with $100 on such accounts, this puts you at a disadvantage in the scope of tradable markets.
There is naturally a limit in how big your lot size can be without losing a substantial portion of your account due to its inherent balance; this is where a cent or nano account may be a practical solution.
Fortunately, there is light at the end of the tunnel for new traders through cent accounts., a special type of account not offered by many allowing traders to execute lot sizes below a micro lot (known as a nano lot – 0.001).
Needless to say, your gains would be even smaller with a cent account, though it’s a more suitable channel for starting. Aside from the lower financial commitment, this account would allow you to trade more markets while maintaining ample margin, which you wouldn’t be able to on a standard account.
A cent account can also be useful for traders testing different strategies and robots with little funds they are comfortable with losing. Overall, a cent account is an option worth exploring if you’re starting with $100 in the markets.
How do I trade successfully with a $100 forex trading account?
You should treat your $100 as a seed you slowly water over time through proper risk management and highly defined trading skills exploiting the best opportunities. Once you can survive at least a year in the game, one may be in a better position to scale up rather than trying to do so from the start.
Overall, for new traders, you should certainly start with $100 if that’s all one can practically afford to lose. By doing so, newbies can avoid some of the mistakes others make at the beginning of their trading journey.
Therefore, by starting with $100, you essentially don’t lose much of your ‘shirt’ compared to a more overconfident person funding a larger figure from the start. What’s more important as a starter is consistency.
It seems all too familiar for most traders switching from demo to live accounts to suffer unforeseeable losses. This reality proves one thing; having a larger account from the get-go is beneficial but doesn’t automatically improve your trading skills.