Trading in the foreign exchange market has become so widespread in our time that everyone who has 10 dollars in their pocket can start trading. Forex brokers strongly support this concept, widely promoting the idea that a minimum of funds is required to trade. The Internet is full of blogs telling how you can turn just a couple of tens of dollars into almost millions in income in the foreign exchange market.
Does this mean that the size of the deposit does not matter? After all, what is the point of investing thousands of dollars in trading, if you can perfectly manage with the amount many times less? Today we will try to understand the very controversial issue of whether the size of the deposit affects the profitability of trading.
Understand the Basics
You cannot start building a house from the top even if you have all the necessary equipment. The same concept applies to Forex trading. Before you start trading – even with a minimum deposit it is necessary to understand the basics of trading and how everything works. Right now it is easy to find information about FX on the Internet. So, take your time, do research and before you make a deposit, learn forex trading step by step. There is no rush until you have the necessary knowledge.
When we talk about understanding the basics we should also mention a demo account, which does not require depositing real funds from traders. With the following method, you will be able to find out more about the trading process.
Difference between large and small deposits
To see the practical difference between small and large deposits, let’s simulate the following situation.
Let’s say we have a spread trading strategy at our disposal, the profitability of which is 60%. That is, out of ten open trades, six are profitable, and four are unprofitable. It should be borne in mind that profitability of 60% is average and is determined over some time interval, for example, six months or a year. If you take a shorter period, for example, a month or a week, then this indicator may fluctuate. A situation that is familiar to every experienced trader is quite acceptable, in which such a strategy will result in a series of five losing trades.
This strategy is used by two traders. The first trader’s deposit is $10, the second trader’s deposit is $500. The loss on each trade is $2. As a result, the first trader is left without money, while the second one has a deposit of $490. The second trader has the opportunity to continue trading, reaching a profitability indicator of 60%. The first trader to continue trading will be forced to replenish his deposit.
Overclocking the deposit and money management
There is one important point here. Of course, a literate reader will pay attention to the fact that according to the rules of money management, the lot size should depend on the amount of the deposit, therefore, with such different deposits, the size of losses will vary as well. This is certainly true, but in this case, we are talking about making money.
To make money on a small deposit, money management rules are often ignored. Very often, overclocking strategies that imply large profits use the Martingale method, order grids, and other methods that have increased risks.
Forget about the risk of 3 percent of the deposit
The classic rule of a couple of percent risk per position was written by millionaires because if they do not risk such huge amounts, it is corny for them not to go beyond the bank’s profitability. Think about it – after all, earning 10% of a $100 deposit is much easier than with a million dollars, isn’t it?
The alternative would be to risk a certain amount rather than a percentage. Thus, you are always risking one amount, which may be even higher in percentage than in the first scheme, but at the same time, it will not change, regardless of the increase or decrease in capital.
Losing any money is unpleasant
Let’s try to look at this from the point of view of psychology. A decrease in the deposit from $ 500 to $ 490 can be safely experienced by a trader without experiencing any acute emotions. But if the deposit decreases from 10 dollars to 0, the trader experiences the shock of losing money, nervousness, and a desire to win back.
The Bottom Line
If you want to invest 10 dollars in trading, so that in a month they will turn into 100, you will hardly succeed, despite all the secret trading robots, insider signals.
However, this does not mean that we are urging you to invest thousands of dollars in trading. Here it is necessary to recall one of the key rules of money management: invest in trading only the money that you are ready to lose. Trading in the foreign exchange market is hard and painstaking work that requires maximum concentration and dedication from a trader. Only then will every dollar you invest be profitable. Otherwise, no matter how much money you invest, the result will be zero.
0 comments