I usually encounter a lot of questions regarding the ideal amount of capital you should put in forex trading. On one hand, I recommend risking money that you can afford to lose. On the other hand, there are plenty of risks associated with being undercapitalized.
You see, once you step into live forex trading, the way you look at capitalization will never be the same. Forex trading is now a business – YOUR business.
This means that you are the manager and just like in any other business, you need to have a business plan. You need to know what you’re going to do from beginning to end and how you’re going to react to any foreseen–and unforeseen–circumstances. As the saying goes, “If you fail to plan, then you’ve already planned to fail.”
So, what’s a great way to start having that business mindset?
One key business principle you need to understand is that it takes money to make money. Before jumping into live forex trading, consider what kind of lifestyle you want as well as the possible costs you may incur (equipment, services, drawdown periods, etc.), because one of the biggest reasons why many traders and businessmen fail isn’t because they aren’t good, but because they are undercapitalized.
Being properly funded will allow you to sweat out periods of bad business (poor trading), and give you a higher chance of surviving long enough so that you may experience periods of good business (good trading). To give you an idea on how much you should put in, here are some important questions that you need to ask yourself:
- Will you be trading full-time or part-time?
- Will you make a living out of forex trading?
- Will you be supporting your family or is it just you?
- How are you going to be educated?
- How much will you spend on trading tools such as charts and news feeds?
- How much can you afford to lose?
- Do you make money from being more right than wrong?
- What is your average variability of returns on a per week or per month basis?
- How big of a drawdown can you stomach?
After answering questions like these, then you can estimate how much you need to start with. Once you’ve decided on your initial capital and have begun your forex trading business, only then can you start growing it.
But of course, like any other business, you should only expand when you are already making money and successful. You don’t build a second McDonalds if your first one is still struggling to rake in profits!
These are all basic management principles, but they will be essential to setting the foundation of your trading career and business. So make sure you have both a solid trading plan and a business plan in place before you decide to get your feet wet and go live.