If you are just starting out trading then chances are that you don’t have a lot of capital to utilize – this is actually quite common amongst new traders simply because they don’t want to lose a lot of money. Even though having a lot of capital can give you more room for error, starting with only a small amount of money can sometimes be the best thing to do.
Traders with a lot of capital have to trade a lot differently compared to those that don’t, and there are many things that you should take into consideration if you are only using a small amount of capital. Throughout this article we’ll be instructing you on how you can succeed in forex with low capital.
Develop a Trading Plan
Before you start trading you should ensure that you have a solid trading plan in place. Your trading plan should mainly be used to minimize your psychological issues that could arise from trading – it will help to minimize stress and instruct you on the next step to take. Your trading plan should include:
- Purpose: why do you want to trade?
- Goals: what do you hope to achieve by trading?
- Platform: who will be your broker? What time frame will you trade?
- Tools: what tools are you going to utilize in order to help you achieve your goals? These involve technical indicators, economic calenders, news feeds etc.
- Pre-market: what will you do to prepare before the market opens, or before you start to trade?
- Risk management: how much will you risk per trade? How much will you hope to gain?
- Trading strategy: when will you enter into a trade? When will you exit?
- Post-market: what will you do after the market closes? This involves reviewing your traders, writing in your trading journal etc.
Your trading plan should be one of the most important things to take into consideration, it should be so detailed that you are able to refer to it in times of need. If you fail to plan then you plan to fail.
One of the aspects that new traders seem to disregard the most is risk management, instead of managing their money wisely they put too much in and hope for that big payout. This is something that you should steer clear of as many traders have lost a lot of money this way. You should have a proper risk management strategy in place which we will detail below.
As a general guideline, you should risk no more than 2% of your capital per trade, so for an account with £500 capital you should not risk any more than £10 for your trade. Obviously after placing a trade you will either gain money or lose money, you should then adjust the risk value accordingly – stick to 2%.
Utilize a Stop Loss
A stop loss is a tool that you can utilize to ensure that you stick to your risk management strategy – it is also a tool that is often misused by traders. For example, your stop loss should not be determined by how much you want to lose, instead it should be determined by the market environment.
If the currency pair you are trading is very volatile then it would make sense to increase the distance of your stop loss – but you also want to stick to your risk management rules – so, you would also have to decrease your lot size. We have detailed an example below.
Your account size is £500 and your risk management rules state that you can risk no more than 2% of your capital per trade – so for this trade you will be risking £10. You decide to trade GBP/USD with the current price at 1.6937, you are hoping that price will move up to 1.7000.
For this trade you decide to trade 1k units of GBP/USD, which means each pip is worth £0.10 – this means that your stop loss can be no more than 100 pips.