Q. I’ve just opened a trading account and I’m looking at trading Forex. Could you give me a rough idea of how much money I need to trade Forex?
A. With Forex, you don’t really need a large trading account to start off with if you are an intra-day trader.
That’s because the market only moves a small number of pips in a day, compared to over a number of days.
But if you are a position trader (holds positions over a few days and weeks), you’re going to need a decent amount of capital to trade Forex.
Here’s why…
Most brokers nowadays offer margins (initial deposits) of 1% and 1.5% of a currency CFD or lots contract (1,000 units) or so.
If you have wide positions (price between your Entry and Stop loss), then you could see your portfolio depleting quite quickly if the trade turns against you.
Here’s an example with the EUR/USD as of 30 May 2024
EXAMPLE: EUR/USD
Currency: EUR/USD
Entry price: $1.0829
Stop loss price: $1.0529
1 CFD: 1,000 units of base currency (EUR)
Margin % per CFD: 1%
USD:ZAR: R18.50
0.01 USD:ZAR R0.1850
First let’s start with the margin (initial deposit).
If you want to be exposed to 1 EUR/USD CFD (Contract of 1,000 units of the EUR, you’ll pay a margin of R167.48.
Initial margin (per CFD)
= Entry price X Margin % per CFD X 1,000 units X USD:ZAR
= $1.0829 X 1% X 1,000 X R18.50
= R200.33
So, you need at least R200.33 to just enter the trade.
However, your stop loss ($1.529) in this example is 300 pips away from your entry price ($1.0829).
So now we need to calculate how much money we can lose per 1 pip movement.
This is known as the pip value.
Pip value:
How much money you’d gain or lose with each 1 pip movement.
Pip value
= (Pip size X Exchange rate in cents) x 10
= [(10,000 X 0.0001) X R0.1850] X 10
= (1 Pip X R0.1850 X 10)
= R1.85
Every 1 pip that moves for or against you, you’ll gain or lose R1.85. This means, in a Forex trade with 300 pips between your entry and stop loss means you’ll potentially lose R555.00
(300 pips X R1.85).
And if you’re following the 2% rule (where you risk NO more than 2% per trade), this means you’ll need at least R27,750 (R555.00 ÷ 2%) in your portfolio to trade just one of these positions.
