Money management and trading capital in Forex scalping and day trading
In this part, we will talk about money management and trading capital.
The minimum trading capital for day trading
In my opinion, a decent minimum is around 5,000$. Why 5000? There is a math behind it.
Lets assume that:
- you risk 1% of your capital
- you look for trade opportunities with risk / reward ratio 1 / 2
That means that with trading capital of 5000$:
- you risk 50$ of your capital (1%) per trade
- you look for trade opportunities which will give you 100$ of profit (risk / reward ratio 1 / 2)
That way even if you are winning less than 50% of your trades, you can have nice profits.
It is not that great if you have less than that. Lets do the math again:
Trading capital 2000$
- you risk 20$ per trade
- you look for trade opportunities which will give you 40$ of profit
Trading capital 1000$
- you risk 10$ per trade
- you look for trade opportunities which will give you 20$ of profit
Trading capital 500$
- you risk 5$ per trade
- you look for trade opportunities which will give you 10$ of profit
Trading capital 100$
- you risk 1$ per trade
- you look for trade opportunities which will give you 2$ of profit
You can see clearly that the lower your trading capital is, the lower potential profit.
There is also a psychological aspect involved. It is really hard to follow your trading plan (and risk only 1%) when your potential profit is something like 2, 5 or 10$. It leads to overtrading or trading with a too big position. So you end up risking much more than 1%.
It is really hard to stay motivated with small capital. Trading is hard, you work hard for your profits and as a result, you get few dollars of gains. That’s why you need big enough capital. My recommendation is 5000$ as a minimum.
Money management is the fundament of your success. When you grow account, it will get even more important. I would recommend two things which may help:
- keep a track of your results
- learn from others
There are great tools like MyFXBook, which help you to analyze your results. You have great statistics about drawdown, gains and many more. You can see right away if you are following your trading plan or not. It looks lke this:
You should see what other people are doing. How they manage their money? There are books about money management in trading. You can also follow traders on social media, read their blogs. Maybe you will see something interesting which you can use in your trading.
What if you have only a few hundreds?
Well, that’s not the end of the world.
If you have only something like 100-200$ then, of course, you can scalp on a smaller position as a training. Do not expect to make fortune with scalping when you start with 100$. You still should follow 1% risk rule. Master your trading plan. At the same time, work a way to get trading capital.
You need that capital. Do not expect that you go from zero to hero in few months with 100$.
How to get trading capital
There are many ways to do that. You know, classic things like saving or getting a job. There are so many ways to earn money. It doesn’t have to be online. You can go and work on the weekends. There are many different approaches. Just figure it out.
Don’t borrow money for trading
This is super important. Just don’t, even if you have a big plan to earn huge money and payback from the earnings. It is so easy to lose money in trading that you do not want more psychological pressure from trading money you do not own. Trust me on that.
It is enough that you invest with a leverage.
Do not dream about going pro with 100$
It may be possible, but that is a risky road to chose. Some people believe that they are super traders and can go from 100$ to 1000$ or 5000$ in a short time. That is a dangerous thinking. Because of that approach, you will most probably trade very risky, not follow a trading plan and you will lose that money very fast. Remember, if you have 100$ then use it to practice with small positions. In the meantime, try to find some extra source of income.
Protect your capital
You worked hard to save money for your trading capital, don’t waste it in a stupid way. Chances are that you are not a trading star, so you have to fight with the market like everyone else. Stick to your trading plan, cut losses, manage your positions wisely, don’t be too greedy. The common mistake risking too much. Just trade with positions which are adequate to your trading capital (so it means risk 1% and so on).
Withdraw profits, be carefoul with forex broker
Let’s say that you make money in trading on a regular basis. That is great. It is a good practice to withdraw some of your profits every month. The main idea here is that you risk only money from your broker account. If you put part of that money (from profit) in the saving account then you can’t lose them.
There is another thing – some brokers, ever big ones can’t be trusted for 100%. Everything can be fine and suddenly there will be a problem with your account, with money withdraw etc. There are many histories like that. You should be careful and always move part of the profits to the saving account.
This topic is very wide, below I will only scratch a surface.
It is all about money and risk management
First, you need to understand and accept fact that money management is fundamental to your success. This is the common mistake – new traders look for that magic strategy, for this best setting for indicators. Yes, it is important, but it is only a part of your trading success. The rest are other factors like money and risk management, psychology.
Read about money management
There are publications about money management in trading. Maybe not in scalping, but still it is good to read them. You can learn from them more about concepts around money management, risk management. I can recommend publications:
But there are many others. Try to search for the best one for you.
You have to know when to close a trade with a loss. Many people struggle with it. They hope that price will reverse. Sometimes it will, sometimes it won’t. Cutting losses is part of every strategy. It is like in football (soccer) – you have to score but you also have to know how to defend your own goal. Without that you will never be profitable in trading, especially in scalping where discipline about cutting loses is so important.
Use leverage wisely
Leverage can be your best friend or worst enemy.
Monitor your progress
You can start your own diary or use online tools like MyFX BOOK. It is important to know more about your decision making.
This is important. In scalping and day trading, you trade with higher leverage so you need trading capital.
Basic info about day trading:
- Forex scalping and day trading for beginners
- Best Forex broker, fx pairs, trading hours for scalping and day trading
- Day trading Bitcoin
- Forex scalping and day trading without indicators
- Time frames in day trading
- Trading desk
Management in day trading:
Indicators in day trading
- Forex ATR – trailing stop loss
- Forex Parabolic SAR
- Moving averages
- Bollinger bands
- Fibonacci retracement
- Support and resistance, Pivot Points