Being serious works
Updated: Jan 4, 2019
One of the questions I hear most frequently from people who are just starting out on their trading journey is "how much money do I need to start trading ForEx?" - or something along those lines. My response is usually in the form of a couple of other questions: "how much do you want to make - and why?" - It is probably not surprising that this is not something that has occured to them ("as much as possible" is the usual response, perhaps unsurprisingly) but it turns out to be rather important, not just in answering the question objectively (which we'll get to) but in defining how sucessful they will be. In trading, as in any other serious pursuit, having a purpose, be it small, like getting to the office on time or huge like setting up a business, always seems to make it's achievement more likely. The reasons for this are best answered by psycholgy books but let's take it as reas for now.
Frequently, I'll hear how the person is frustrated in their day job and they've heard somewhere that by learning how to trade FX they can become financially independent. This resonates with me because it's pretty much the mind set that got me into this but I wish I'd had someone ask me those questions back then because I'm pretty sure it wouldn't have taken me so long!
So what are your expectations and purpose? ... Do you really want to competely walk away from your day job? augment your income? or just have Fun! (God forbid that work is ever fun?!). In order to frame this properly, we need a little reality check because, as I've hinted in other places on this website, there are those "out there in the retail trading industry", who will alow you to believe (because it's what you want) that if you plonk a few hundred quid in a spread betting account and buy their signals service / trading system / training and all mannor of weird indicators and other (what I'd call whitcraft!), riches beyond the wildest dreams of bingo halls will be all yours! But let's take breath.....
Let's assume we want to really make this life changing decision and take the leap. Let's also assume that you've got an approach that makes money. The Calculation takes us ack to the question. How much money do I need to start with? Applying some simple arithmetic and logic to empirically gathered evidence. Let's say we have £10,000 sitting in a savings account generating 2% per year and we think we can put it to better work by trading it. Starting from Brass Tacks - we agree a plan with ourselves that we will only ever risk a maximum of 1% of our accont per trade. So,1% of £10,000 is £100 means, we are not going to lose more than £100 on any trade. If we're trading FX - we should assume a stop loss distance of 60 pips minimum - if we're serious remember - because otherwise, with it being impossible to judge entries perfectly every time (if ever), we need wriggle room for the price to meander around your entry before it gets going, otherwise we're going to get whipsawed out of most/every trade we enter and our £10k is quickly £9k and then we're fighting a rear guard action. Calculating our position size £100/60 >> gives us £1.67 per pip. Reward to Risk - Now we only want to be trading setups yielding high probability 3:1 reward to risk probability. So if our max loss is £100 (by correctly placing our stop loss) then we take profit at 3 x 60 pips x £1.67 = £300.
Let's say we reckon on finding one of these 3:1 setups every day - so that's potentially 5 x £300 BUT and this is a BIG BUT ... a typical winning trades / losing trades ratio is 40/60, so only 40% of your trades will be winners - ie 40% of 5 = 2. So you will get 2 winners every week = 2 x £300 = +£600 per week and 3 losers (5 days a week >> 5-2 = 3) per week @ 3 x £100 = minus £300 per week. Net - you make £600 - £300 = £300 / week - working, say, 48 weeks / year >> 48 x £300 = £14400 per year. Hmmmm .... much better than the 2% in the savings account for sure but a sobering realisation? You can play with the numbers to make them sound better but the ONLY number that will truthfully change the bottom line is your starting figure. So how serious are you? The learning: to make money trading FX you have to start with money.