How much money is required for Forex trading? In order to find out, it is necessary to study the mechanisms of making a deal.
First, when a trader buys a currency, he doesn’t buy Euros or British pounds, he buys a currency pair, e.g. euro-dollar (written like this: EURUSD). This means that we are buying Euros for dollars. The currency which is written first is called theBase currency; the currency which is written second is called the Quote currency. And a trader doesn’t buy the amount directly; the forex trading is done by lots. One lot represents 100,000 units of a base currency. In other words, in our previous example, we are buying 100,000 Euros on Forex trading market. How many dollars should we be paying for it? There is a notion of “currency pair exchange rate” which is a monetary denomination of the cost of a currency pair, to be more exact, a unit of base currency expressed in quote currency. And when we say that a euro/dollar costs 1.3875, it actually means that for 1 euro we may get 1 dollar and almost 39 cents. To buy one full lot of such a currency pair we need to pay 100,000 * 1.3875 = $ 138,750 on Forex trading market. Obviously, very few people have this kind of money. And this is why traders have lately been working on a marginal basis.
A margin is a deposit. When a bank opens a position for a trader, the bank is actually paying for the entire lot, and the trader gives the bank a deposit 100 times lower, i.e. “the leverage” mechanism is applied. Usually the leverage is 1:100 on forex trading market. Accordingly, the Forex trading deposit in this example will be $ 1,387.50. When a forex trading position is closed, the deposit is returned to the trader in full, regardless of the result. Because of this, in order for a trader to make a deal, he needs a certain sum of money for a forex trading deposit, and his account should have some extra money as a so-called “safety net”. Usually, the deposit sum for various currency pairs is shown in the Contract Specification Table. For example, in forex trading for the currency pair British pound/dollar (denominated as GBPUSD) to make a deal in 1 lot with the leverage 1:100, the deposit will be 1,000 GBP which is about $ 2,000, and for the currency pair New Zealand dollar/US dollar (denominated as NZDUSD), 1,000 NZD, i.e. about $ 600. For all other currency pairs the deposit will be almost the same, i.e. the deposit will almost never exceed $ 2,000.
Thus, an important piece of advice for traders:
The minimum sum required to trade in one lot should be about $ 2,000-2,500, and the greater the sum, the more relaxed and safe the forex trading is. No matter what, before opening a forex trading position, the trader should first analyse the market to find a profitable situation where money can be earned.