The importance of developing risk management skills for Forex scalpers
Many novice traders often prefer scalping in Forex, where the high-frequency trading method promises them tangible profits at the end of the day. Day traders often choose scalping as a series of transactions, whose total payback just brings a good income. However, every newbie faces a dilemma: to become a Forex scalper with a minimum start-up capital or to try to increase the initial amount that they invest in future trading? What to do to ensure that transactions in Forex do not carry the risk of losing your deposit? And are there universal guidelines for the minimum capital size?
In order to avoid misperception of market processes and Forex trading itself, we are going to talk in advance about the realisticness of such expectations. Any interaction with the currency exchange is already a risk, therefore, no one can give absolute guarantees of break-even transactions. Starting to make money on high-frequency Forex trading, a novice trader should be aware of the degree of risk on their own. Transactions based on large sums of money can lead to large profits, respectively, the danger initially lies in the fact that the trader risks all the funds invested in trading, thus, it’s crucial to understand this fact in the very beginning of your career as a trader.
The opportunity to make great money on high-frequency Forex trading so excites the minds of gamblers that some impulsive traders put literally everything on the line: real estate, material values, hard-accumulated money. Someone even takes out a loan from a bank and starts to take big risks, engaging in Forex scalping for borrowed finance, which is a really dangerous action.. Stock trading experts unequivocally do not approve of this approach, since the debt obligations will in any case remain with the trader, and if instead of the expected fabulous enrichment they receive only losses, then debt recovery can turn into a serious problem.
In this regard, it is necessary to understand the importance of competent and adequate risk management if you want to become a truly successful Forex scalper. Is there a universal algorithm by which a novice trader could calculate exactly how much money should be in order to start profitable high-frequency Forex trading? The answer to this question lies in the choice of a specific trading strategy, there is also a dependence on the plans and ambitions of an individual person, so it would be most reasonable to consider all these aspects in the framework of various situations, which we will list below.
Specific amounts of start-up capital depending on the strategy
A clear understanding of their potential profit requests and mathematical calculations can help the aspiring Forex scalper formulate their ideas about the base capital for trading. There is an interesting fact: in the United States, for 10 years now, there has been a legislative ban on opening trading accounts for an amount not exceeding $ 25,000. Of course, each country has its own laws, but this example is very indicative, since here we can see that the initial capital in this amount is generally considered insufficient to carry out profitable transactions in Forex. Note that the above-mentioned prohibition applies mainly to accounts of day traders.
What are the real amounts initially deposited by traders into their trading account? How much money does the average Forex scalper need for minimum capital? If you are planning to trade on a short time frame, then prepare to stock up on more money than a trader who works on a longer time frame. It is known that a shorter timeframe can lead to an increase in costs, therefore, in this situation, we see an intercorrelation: a short timeframe implies a larger start-up capital for high-frequency Forex trading. If we talk about the amount, the experts advise depositing from $ 50,000 to $ 100,000 to the trading account.
This is the insurance amount in case of one or more losing trades. If a Forex scalper cannot immediately enter the rhythm of profitable trading, but makes tactical mistakes that will lead to losses, then it is important to preserve purchasing power for your capital. It is for this that a certain reserve is provided in your initial funds. At the very least, a series of losing trades will not deprive you of the freedom to choose your next trades. These factors, namely the ability to purchase commodity products and the ability to maintain the purchasing power of capital, play a key role in choosing the minimum amount to start.
It is worth paying attention to other Forex trading strategies, for example, swing trading. Stock trading professionals believe that a slightly smaller amount may be suitable for this style than for day trading. Swing trading takes place between day trading and long term trading. It can be classified more as a medium-term strategy, therefore, the timeframe here will be larger than in the example described above. Therefore, we will call $ 30,000 a suitable amount for comfortable execution of transactions in Forex. Again, this amount is not taken out of nowhere, this amount of starting capital on a trading account is due to the specifics of swing trading as a strategy.
Many yesterday’s Forex scalpers, who recently learned to trade profitably during short sessions within one trading day, over time become interested in positional trading, and then investing. It is natural for a person to look for the optimal and most financially productive activity, so it often happens that a short-term trader can switch to positional or long-term trading with large timeframes in the long term. How much minimum capital is needed in this case? And how much money does it take to become an investor?
In principle, any clearly indicated amounts are usually not indicated here, but the rule should be adhered to, according to which, in position trading, you do not need to risk more than 1% or a maximum of 2% of the entire deposit, then risk management can be maintained at the correct level. As for starting an investor career, a minimum capital amount of $ 1,000 to $ 2,000 is allowed. And now that you have got a basic idea of what the initial deposit volume is, depending on the strategy, let’s move on to the following significant reasons for choosing the minimum capital for profitable Forex trading.
How to understand how much money a Forex trader might need on a trading account?
We are starting to analyze other important criteria by which you can reach an understanding of how much of the deposit you need individually. If you have already decided on a trading strategy and have chosen, for example, the Forex scalper path, then the second step on the way to competent and rational trading will be to conduct a kind of brainstorming session: you will need to carefully think over several essential nuances that make up the global picture of your specific style and trading plan. So, let’s list these points that require careful thought:
- ask yourself a question about the priority of buying certain assets;
- take care in advance to diversify all acquired assets;
- analyze the directly proportional relationship between the amount of the deposit and the amount of theoretical income.
Why is the question of what trading products you want to buy important? How can this affect the choice of the minimum amount of starting capital for Forex scalping? The fact is that if we take, say, one share of a certain company as the initial unit, then its value multiplied by the number of assets desired for the acquisition will already be able to tell you how much money will need to be deposited into a trading account. However, the idea of acquiring assets of only one type (or one company) is not productive, which we will now discuss in more detail.
Experienced traders and investors are strongly advised to compose your portfolio from different, unrelated assets. Why can this be important both for the Forex scalper and for the investor in general? The answer concerns your capital, or more precisely, the risks for it. If you compose your stock portfolio from assets of this type, then under unfavorable economic circumstances, its value may sharply decrease, moreover, difficulties may arise with the sale of these assets. Thus, it is important to draw up a diversification portfolio, which will include both currencies and securities or stocks of different corporations.
The amount of income from Forex trading can be expressed as a percentage, which is the sum of how large the initial amount of the deposit was. Recall, if you want to enter the ranks of Forex scalpers and adhere to the high-frequency trading methodology, then in this case, against the background of a short timeframe and unforeseen circumstances in the form of unprofitable transactions, it is advisable to make a larger base capital. This will relieve you of the constraint in choosing actions and contribute to the development of flexibility in your analytical thinking. You will have access to more interesting options for trading scenarios in Forex. What else can you recommend for beginner Forex scalpers?
First of all, it will not be superfluous to undergo preliminary training, read financial literature, listen to the advice of experienced traders and investors. Familiarization with the fundamental concepts of stock trading is also useful because this knowledge allows you to talk more substantively about the amount of money you need to start. Choosing a Forex trading strategy that suits you, you can first practice trading on a demo account, after which you can look at the mistakes made and realize what external circumstances or personal shortcomings led to losses. If you treat Forex trading soberly and impartially, and also not be afraid to make mistakes in the process of accumulating experience, then very soon you will be able to safely deposit real funds into a real trading account and start an exciting path to successful transactions.