How to Start Forex Trading With $1,000
In the stock market, most US brokers will require you to have at least $25,000 to start day trading. In the forex market, you can find a broker who’ll accept a $1,000 deposit, as some go even as low as $100. However, this is still a small account. This is to mean that you should not expect to be taking home the big bucks yet – you have to grow your account over time. As long as you practice appropriate risk management, choose your broker wisely and place a good number of trades per day, you can maintain steady profits. Let’s break down how best to go about this.
Choosing a broker
Since we’re trading a small account, we’ll want a broker that charges as low a spread as possible. Typically, ECN brokers charge the lowest spreads, as they allow you to interact directly with the market. In addition to lower spreads, this reduces the probability of slippage, as orders are executed faster. Other brokers who operate a dealing desk may be slow to fill your orders, and they also charge wider spreads.
Usually, the forex market is divided into four trading sessions: Sydney, Tokyo, London, and New York sessions. The London and New York sessions see the most volume for the most popular major pairs, which translates to higher liquidity and higher volatility, both of which are factors we rely on. The London session runs from 7:00 AM to 4:00 PM UTC, while New York opens at 1:00 PM and closes at 10:00 PM UTC. During such high-volume sessions, most ECN brokers will charge a spread of 0.1 to 0.5 pips.
Additionally, you will want a broker who offers micro-lots. This is because our $1000 account balance can only afford to buy 0.01 lots. For this position size, a pip will be worth $0.1. Though this may not sound like much, trading a micro lot helps reduce risk. Additionally, you will want to take out leverage of 30:1. We may not use it, but it's better to have it and not need it than need it and not have it.
Implementing a scalping strategy
As a rule of thumb, you should never risk more than 1% of your equity on a single trade. This means that for our $1,000 account, the maximum risk per trade is $10. Using a 1:2 risk to reward ratio, we can aim for a 20-pip profit target while risking only 10 pips. This is well within our risk management limits. Here is an illustration of this strategy in practice.
The image above shows a scalping strategy using MACD and Bollinger Bands indicators for signal generation. The strategy aims at a 20-pip profit while risking only 10 pips. Just a few hours after the New York session opened, two ideal trade setups had already manifested. Within a trading day, one could make 3 to 6 such trades.
Assuming all are successful trades and a risk-to-reward ratio of 1:2, you make 2% profit per trade and a total of 6% to 12%. This is just wishful thinking because chances are you will seldom achieve a 6-12% gain in a day.
For our intents and purposes, let’s assume a win rate of 50%, 4 trades a day on average, a stop loss of 10 pips, and a profit target of 20. There are 20 trading days in a month. To keep our risk per trade within the $10 threshold, we can trade a maximum position size of 10 micro lots, or one mini lot (10 * $0.1 per pip * 10 pips = $10), or (1 * $1 per pip * 10 pips = $10). Therefore, assuming a position size of 10 micro lots here is our expected monthly income:
20 days * 4 trades = 80 trades total.
We win 50% of 80 trades = 40 profitable trades and 40 losses.
Each winning trade made 20 pips gain. This translated to (20 pips * $0.1 per pip * 10 micro lots) =$20.
Each losing trade set us back 10 pips. This was equivalent to (10 pips * 0.1 per pip * 10 micro lots) = $10.
In a month, we had 40 winning trades * $20 = $800.
Our total monthly loss was 40 trades * $10 = $400.
Thus, our profit for the month minus commissions would have been $800 – 400 = $400.
Assuming a round trip commission is $0.05, monthly fees would amount to $0.05 * 10 micro lots * 80 trades = $40.
Net profit for the month is $400 - $40 = $360.
The effect of leverage
From our calculations above, we made a $360 profit from an investment of $1,000. This is an ideal scenario that will most likely not happen in real life, as a number of situations could go awry. For instance, we could lose more trades than we win, or we could fail to reach 4 daily trades on average.
Be that as it may, this was a profit of 36%. The only way this is possible is by using leverage. Since we traded with 10 micro lots per trade, we used a 10:1 leverage. If we had used no leverage, this profit would have been 3.6%, and that’s assuming ideal conditions. Therefore, leverage greatly amplifies your profits. However, if we ended up with a net loss instead, it would have amplified this loss just as much. If a black swan event happens, you may not be able to exit your position, which could lead to larger losses than your account balance. Examples of such events that happened recently are the GBP flash crash of 2016 and the CHF surge of 2015.
Unlike the stock market, forex brokers will often accept minimum deposits of $1,000, with some even going lower. However, this is a small account, which means you should manage your expectations and focus on growing your account alongside your trading skills. It will be a few months before you can start making substantial profits, but with discipline, you will get there. Lastly, take leverage with a grain of salt, as it can make or break your career.
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