When it comes to any form of investment, including day trading, being undercapitalised can easily lead to a trader losing all their money.
Most successful traders don’t start off with just 100 USD in trading capital. Contrary to what advertisements from Forex brokers offering high leverage may have you believe, for the most part, traders do need a substantial amount of starting capital in order to trade Forex successfully.
However, it is possible to build a steady bankroll despite being undercapitalised.
One should recognise, however, that the rate of return will be slower, which means that traders need to be very patient when it comes to expecting rewards.
A common misconception in Forex trading is that traders expect to make 50% returns outright. If only it were that easy, almost every second or third trader would have become a millionaire.
A part of this myth comes from so called trading gurus who sell courses and trading strategies that promise you riches. But this is not always the case, and the reality of trading is very different.
The markets, as you might know, can be very irrational at times. This increases the level of risk and can quickly wipe out any potential gains being made as well as affect your trading capital.
In order to be successful at Forex trading with a small account balance, traders need to exhibit a great deal of discipline and patience. The rewards will come at a gradual pace and trying to force your way through with unrealistic returns will only be detrimental and defeat the entire purpose of your trading.
While most traders dream of large capital to trade with, the reality is that many average traders may only have around 500 USD or 1,000 USD to trade with. Ideally, you need to have at least 10,000 USD on your trading account in order to expect some decent returns.
Of course, by now you should understand that even if you achieve a 5% return on the Forex market, which is a great milestone in itself, a 5% return on 10,000.00 USD is 500 USD, while the same 5% return on a 1,000 USD account is just 50 USD.
Looking at the psychology behind this, traders start to get impatient and begin to take on more risk. Traders justify this by telling themselves that if they can achieve a 5% profit, they can now aim for 10%.
Sooner or later, however, the markets will humble the trader, eventually leaving them with just a few cents. This is all due to the trader being undercapitalised and not following the rules properly.
Trading on a small account
Trading on a small account with a small amount of capital requires a lot of work. First and foremost, you must give yourself at least a few years if you expect to bank some decent profits. This means consistent hard work and paying attention to your risk management principles.
Some traders take the easy way out and become overleveraged. This is done in order to take on more risk than they should. Eventually, being overleveraged can lead to losses that exceed your initial capital.
As such, paying attention to leverage is important. Even a slight slip of the hand can or one small mistake can lead to your previously hard-earned profits being wiped out.
Discipline plays an important role. Sticking to your trading rules and your risk management rules, even if it means that it gives you just a few dollars in profit, can help you to achieve consistency in trading.
The pressure to make profits can also build up on traders with a small amount of capital to trade. This pressure can lead to mistakes that could have been avoided in the first place. Thus, paying attention to leverage and your risk management is of the utmost importance.
Trade with leverage
Traders with a small amount of capital to trade must use leverage wisely. Although the general norm is not to use more than 1:10 leverage, if you only have capital of around 500 USD, you can theoretically use up to 1:200 leverage.
In other words, if you risk 500 USD, you can control up to 100,000 USD based on leverage alone. Tempting as it might seem, note that the risks are also equally big.
A good way to use leverage to your advantage is to focus on just a few currency pairs. Having too many open positions will mean that your leverage is distributed across the positions. This means that the crucial trades that have the potential to make money become compromised.
Thus, staying focused and trading just a few currency pairs will leave you with enough capital to cover any wild swings in the market.
One of the biggest challenges with traders that are undercapitalised is longevity. Longevity is based on how long you can continue to trade based on the capital you have available.
This goes hand in hand with the consistency that your trading strategy can produce. Consistency comes with familiarity with the markets and mastery of your risk control practices. You should know that when it comes to trading, all aspects are tied to each other. And if you miss out on just one of these aspects, you can expect to incur losses. For undercapitalised traders, taking on losses will only result in their accounts being depleted even more.
To trade conservatively, traders should focus on a particular instrument for trading. Most often, traders tend to focus on trading instruments such as gold and silver. The tick size and values are higher here. While it promises you higher returns if you are right, it can equally diminish your profits and trading capital equally quickly. Therefore, the first step is to focus on the currency pair you want to trade and do your homework on it. Focusing on the fundamentals that drive the currency pair, the trading volume, and liquidity, among other factors can help you to take a more objective role in deciding how to trade.
In conclusion, it is quite clear that traders who are undercapitalised are under pressure. The pressure to make profits and grow their accounts efficiently and consistently means that traders need to be alert at all times.
Focus must also be given to all aspects of trading; from risk control to your trading strategy. Psychologically as well, an undercapitalised trader must always remain patient and disciplined if they want to see any profits in the first place.
The markets are notorious as they can give you profits only to take them back very quickly. While most undercapitalised traders dream of making it big, remember that the road to success requires a lot of discipline, understanding of the markets, and most importantly, having the patience.