This is the kind of question that gets asked a lot by beginners. After they become a little bit more familiar with forex trading, they’ll start asking ‘how much money do you need to trade for a living ?’. Well, that’s a subject for another article.
If you look at brokers’ offers, you’ll notice that many have no minimum amount for opening a live account (Oanda, CMC Markets, FXDD and so on) while others have very low limits ($100). It would appear that we already have the answer for the question in the title, but it would be a very superficial one.
The fact is that the right amount of money for your first trading account depends very much on who you are. All other things being equal, one thousand dollars means one thing for the guy with a $2,000 monthly wage and quite a different thing to another guy making $7,000 a month.
The two most important differences between a demo and a live account are these:
- you can’t buy anything with demo dollars.
- a live account doesn’t have a reset button.
They are the sources of pain and exaltation that make live trading such a dissimilar experience to demo. I want to concentrate on the pain, and I’ll start with a quote:
Anyway, I think it’s no coincidence that our greatest champions, our greatest artists, our greatest leaders, our greatest everything all seem to have experienced some kind of gut-wrenching loss. I think their greatness, in part, was fashioned on the crucible of that defeat. To a certain extent, I think that holds true in my field as well, and I am leery of traders who have never lost it all. I think that intense feeling of desperation that accompanies such a horrifically deflating experience indelibly cauterizes great risk management reflexes into a trader’s very being. Paul Tudor Jones in a commentary on Reminiscences of a Stock Operator
Pain has had an important role in our evolution as humans (and the rest of the animal life for that matter). Just imagine being unable to feel pain to cold, heat, being cut or hit and so on. You wouldn’t be able to survive on your own for too long. I believe the same thing is true in trading: if you can’t feel pain when losing money, sooner or later you’ll blow your account.
To be able to develop trading pain sensors, so to speak, you need a live account with enough money in it that when you lose 20-50% or even the whole account, you’re not out on the street, but you do feel some actual pain. Otherwise, it’s real trading in name only. You’re the only one who, after revising your financial affairs, can come up with some figures as to how much would be needed in that respect.
I liken the first live trading account to a child who is taking his first steps. Let’s say he comes close to the burning coals you’re preparing your barbeque on, touches a coal with his finger and gets burned. Through the subsequent pain, he learned a valuable lesson – extreme heat is dangerous. Now imagine he hadn’t felt anything. Next time he would’ve taken an entire coal in his hand or would’ve sat right in the middle of the burning coals. Not a nice thing to imagine, I admit.
In trading, the main goal of your first real money account should be to teach you to feel pain when you let your losses run to -20%, -30% or more. Otherwise, you only set yourself up for bigger financial damage further down the road.