This article looks at the controlling of risk that comes with low forex capital.
One of the benefits to trading on the forex market is the fact that you can do so with limited capital. There are a lot of forex brokers that allow you to open a trading account with very small amounts of capital. Some brokers even offer accounts that need a deposit of a single dollar to be opened. However, one of the problems that come with this limited capital is an increase in the risks of trading. It is important that you know what the risks of limited capital are and how you can control them.
Having the Right Amount of Capital
Some traders state that the best way to limit the risks of your capital amount is to use the right amount of capital. The problem with this statement is that the right amount of capital is relative to the trader. The right capital is also often much more than a trader may have available to trade with. Ideally, you will want the largest amount of capital possible because the larger your capital the lower the overall risks are.
Having Too Little Capital
While the right amount of capital is relative the amount that is too little is not. While you can open a trading account with a dollar you cannot actually trade very well with this amount. It is important that you consider how much money your trading strategy needs. It is recommended that you have at least $50 in your trading account as your initial deposit. Anything lower than this is considered too low and you will not be able to trade very well with it.
What are the Risks with Forex?
It is important that you know what the risks are of low capital. The main risk comes with the use of leverage. There is a strange cycle that comes with traders who have limited capital and the use of leverage. Many traders with limited capital will state that they can still trade correctly because they can use leverage. However, the use of leverage with low capital increases the risks until you are risking your entire account on a single trade.
Another risk with low capital comes with certain trading strategies. If you are looking to range trade with low capital you can have a major problem. Range trading requires deeper pockets than trend trading. The reason for this is that your trading account has to buffer the fluctuations of the market during the long-term trade. If you do not have enough capital to do this the n you risk a margin call and losing your entire trading account.
How to Control the Risks
You may wonder what can be done to limit these risks aside from increasing your capital. Increasing the amount of capital you have is the ideal and the best way to limit the risks. However, this is not an option that all traders have. Having good risk management strategies are an alternative that you have to look into. Another is to not use any leverage, but this lower the returns you can get to a point where trading may not seem worthwhile.