The practice of Forex trading is an enticing prospect to investors because of its accessibility. That is, there are not too many restrictions involved in entering the market. When an individual decides to start forex trading online, there is a certain strategy that they follow. Most traders carry out short-term trading where they take up a trade at the beginning of the day but close it at the end of the day. These traders are known as Day traders and are found on the best forex trading online platforms. Day traders have such short trading windows because they are unable to devote long hours to it.
Minimum capital a day trader requires
A day trader should have $ 25,000 in their account before entering into a trade in the USA. If the balance is lower than this, the trade is not allowed unless the trader can increase their balance above the minimum. The deposit should take place in the customer’s account before the day of trading begins.
The leverage in day trading capital
The leverage associated with day traders based in the US can go up to 4:1 as offered by some of the best forex trading online resources. This implies that an individual that starts the day with a $40,000 account balance allows the trader to hold $160,000 in day trading positions. Some platforms offer lower leverages.
Understanding the risks
Forex trading involves buying low, gaining a net profit after selling high. The primary risk one faces during day trading is the fluctuation in the stock prices. The volume of these markets is vast. Therefore, both trading veterans or beginners carry out trading at a given time because trading does not require large capital.
Types of trade risks
There are some major risks associated with forex trading. These include:
- Interest Rate Risks: This risk is associated with the fluctuation of the interest rates that take place in a certain country.
- Leverage Risks: In constantly changing market conditions, the extensive use of leverages will lead to losses that exceed initial investments.
- Transactional Risks: They refer to the time lapse between opening and settling a contract.
- Marginal Risks: This is another case that increases losses significantly. It is the risk that a trader goes bankrupt upon entering a forward contract.
Management of risks
Given the unpredictability of trading, risk management possesses an important position. The common consensus is that leverage trading possesses the highest degree of risk. Traders can also utilize the 1% rule to reduce the damages of trade risk. This means that a trader should look to risk only 1% of their capital for a single trade.
Lot Sizes and Pips
Before one can start forex trading online, there are two terms that every day trader should know to determine minimum capital. Lots refer to the units in which forex trading takes place. The three kinds of lots are micro, mini, and standard lots. On the other hand, Pips are used to represent the change in the currency price in a trade. The value for every currency other than JPY is 0.0001. For JPY, it is 0.01.
Calculate your minimum capital before trading
As a beginner, it is important to set a minimum capital to manage the risks better. Consider a $100 risk. Adding the 1% risk confederation, the risk amount is $1. To determine the trade risk, one has to multiply the number of pips with the pip value and the number of lots. If the trade risk is more than the 1% mentioned above, one should rethink the strategy.
Participating in forex trading requires a fair bit of planning to prepare for a possible loss. Therefore, implementing certain parameters can drastically mitigate the risk of incurring substantial losses during this time.