Working with a Small Initial Cash Reserve

July 21, 2014

It’s easy to think that Forex trading is the sole domain of big investors dealing with trades involving thousands, or even millions of dollars, but the reality is quite different.

While there certainly are some big investors in the market – just think about governments and large financial institutions – there’s also a thriving global community of what are known as Retail traders. This community is made up of a huge range of people and groups; Mum and Dad investors, part-time traders, hobby traders and any number of others. But regardless of what you call them, they all share many of the same characteristics, namely that they’re not full-time professional traders and trading is not their main source of income.

For most retail traders, Forex trading is simply looked at as a way to generate a bit of extra income. That could be for any reason, from seeking a higher return than leaving money in the bank or working towards a specific financial goal (such as saving for a holiday). And what you often find with retail traders is they start out with a relatively small initial account balance – sometimes as low as just a few hundred dollars.

If you’re a trader starting out with a small cash reserve, here are some tips for your Forex trading strategy…

Be realistic

While you might dream of becoming a quick millionaire with Forex trading, if you’ve got a small account balance you’re definitely not going to get there in a couple of trades. You need to accept that it’s going to take time, patience and careful money management to build up a healthy account. Eventually, as your balance grows, you’ll be able to trade towards greater returns. Just make sure you accept losses and manage greed in your trading and you’ll be on the path to a larger account.

Know your costs

When you have a small balance, every bit of it counts. That’s why it’s important to check what it costs you each time you trade. If your trading costs and fees are eating too much into your profit, it’s probably time to re-think your Forex strategy.

Risk management

If you risk too much and lose, it’s a significant setback. If you risk too much when you’re capital is small to begin with, it can be disastrous. You must manage your risk using lot size and leverage in accordance with your overall capital. The simple fact is traders with larger accounts can afford to lose more than those with less. Concentrate on trading using good risk:reward ratios.

Leverage

By using Forex leverage, you’re able to take positions in the market even when you don’t have the full amount of capital required. While this is a very effective method of letting traders with small account balances punch above their weight, it also carries a very high level of risk and can magnify losses. Leverage should be approached very carefully by any trader.

Before jumping straight into live trading, test out a free demo account for 30 days. Trade with it like you would with a free account without the risks.

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