Can you really make a living by trading small Forex accounts?
Many new traders that I’ve worked or been in contact with, have a Forex trading account of about 2000$ or less.
It is usually the case of people who have just started trading and, wisely enough, they are being cautious before putting up more money at risk.
Or, the other option, these are people who have already been burned by the markets, blown up several trading accounts and now they try to gain back their confidence by risking less money.
There is also a third option, which is more common than you may think – Most new traders that join the FX market can’t afford, or simply don’t have enough capital. The industry defines a small trading account as an account of less than 25,000$, but the truth is that most traders don’t even get close to that amount. That is why Micro accounts were created by so many brokers.
With that being said, these micro accounts traders, despite the lack of capital, frequently ask me if they can make a living out of trading Forex.
For the more experienced traders among you it may sound like a crazy question. The truth is that is is a very common question and I’m not surprised – The FX industry, the brokers, the marketers want you to believe that you can… and they are pulling out all the stops to make that happen.
what do you do, or what can you actually do with an account of less than 2000$?
The purpose of this blog post is to answer the question of whether or not you can make a living out of trading small accounts and to provide you a guideline and tips of how to use such account to create growth.
I’m sure that by the time you’ll finish reading this blog post, you’ll realize that there are plenty of things you CAN do with a 2000$ account, but there are also limitations to what you can accomplish with such capital and there’s a reality that you must be aware of and accept.
First thing to do – Choose the right broker!
When you are trading a small account, every pip counts!
You need to make sure that you are provided with the best trading conditions and that includes:
accounts – Including:
- Option to trade Micro Lots – With Micro Lots, each pip equals about 0.1$ (Unlike 1$ in Mini-Lots). Trading mini-lots when you have a small account reduces the number of trades that you can make because you are required to risk large % of your trading account on each trade. Trading Micro Lots allows you to take more trades and therefore increase the odds that your trading strategy and your trading edge will create growth in time.
- Commissions – Each pip you lose on commission, is a pip you need to earn back by putting on a winning trade. The lower the commissions you get by the broker, the less effort you need to gain those commissions back. With low commissions your winning trades create immediate profit in your account.
- Slippage and Order execution – Just as I mentioned in point number 2 – The broker should have the minimum effect on your trading performance – If you’re order isn’t filled at the desired
level, you have to risk more capital than you originally planned – That is a disadvantage. Make sure that you test your brokers order executions and slippage before you open an account. Don’t hesitate to close an existing account if you find problems with orders executions.
Set realistic goals
Allow me to answer the question that I mentioned in my intro words now – No, you can not make a living out of a small trading account.
Now let me explain…
First thing – If you disagree with me and you think that you can make a living out of trading a 1000$ account… or if you can think that by trading FX you can multiply your trading account on a consistent basis throughout time, I highly suggest that you’ll stop reading this post now, take your money and put it on Red or Black at the Roulette table. You’ll have much higher chances to double your money (almost 50% chances) at the Roulette table.
Now let’s address the issue by doing some math:
As mentioned above, the dream is to make a living out of trading when the initial capital is 1000-2000$.
Let’s assume that for a single person, an income of 300-400$ per month is sufficient to get by… not to be rich, just for the basics.
Assuming that you agree that a person can live out of 300-400$, it means, that from day one, this person needs to make a 30-40% return on investment (on a 1000$ account)….each month!
Does it sound like a reasonable scenario? Achievable goal?
Even if you can pull out a streak of few successful trading months, I’m sure you’ll agree with me that it isn’t realistic to think that you can constantly generate such a return on a monthly basis – That’s a yearly return of almost 500%. If you can achieve that, I’m sure there’ll be plenty of people who will hire you as their funds manager.
Hell… If you think you can do it, and you can prove it, let me know how I can invest my money in you.
Now let’s take it a step further.
Assuming that you really think you can generate such returns on a monthly basis, there’s one more point that you have to consider.
In order to make 30-40% a month, you need to risk at least 10-20% a month (assuming you are keeping at least 1:2 R/R).
That means that if you have a bad streak, you can easily wipe out your account with just 5 bad trades!
Think about it ….
As a trader, your edge (your trading strategy that generates income over time) is time and occurrences dependent – Your edge (assuming you have one) should appear over large number of occurrences (trades). That means that you should allow yourself enough trading occurrences for your edge to work and generate the income that it was tested to provide.
You need to risk less in order to preserve your capital and that means also that you have to compromise on your potential gains.
So what is a realistic goal?
Now that you understand that you can’t get rich, or even make a living from 1000$ account, time to set real goals:
- 1. Aim to make a small and constant income – Not losing money is something that 90% of the traders can’t do.
- 2. Aim for 2-5% return in a month – That’s more than 24-60% a year!
As your account grows and you gain confidence as a trader, you can slowly increase your position size to expedite the growth process.
Don’t change your trading rules and keep the allowed % at risk at the same levels! Success isn’t a sprint – It’s a marathon.
Focus on learning the trading profession not on your income
To be honest, trading small accounts should be all about learning.
Although there are demo accounts and virtual money that can be used to practice and learn, real accounts, no matter how small they are, are better. By trading virtual accounts you do not deal with the psychological side of trading. With real accounts you do.
If you have only small capital to risk, use it to practice and improve your trading skills. Here are few examples of what you can learn with small accounts:
- Risk and Capital Management – Practice discipline, how to use proper position size and how to hold on to your winners and cut your losses short.
- Generate constant and steady returns with minimal draw down.
- Writing and Executing a trading plan – Finding trading opportunities, using a proper stop loss (based on technical analysis) and setting targets.
- Test your system – Find out on which Forex pairs your system works best and which pairs you should avoid trading.
- Find out which trading style suits you – Day trading, Swing trading or Scalping.
There’s a lot that can be learned by trading small accounts. Use this experience to grow yourself as a trader and also your account.
How to properly grow your account?
Once you’ve reached a level that you can generate constant income out of your small account, perhaps you are ready to take the next step and start trading bigger account..
If you’d managed to generate a positive yearly return with small account, you can perhaps start growing your account by investing more money into it. My advise is to invest the sume that you’ve earned (for example – Fund your account with additional 300$ if you managed to generate a 30% yearly return on a 1000$ account).
That may be a slow and gradual process, but in that way, you’ll not only grow your account, you’ll also slowly and methodically learn to trade bigger position sizes and properly
manage bigger accounts.
Another way, if you can afford it and you’ve gained enough confidence in your trading skills – Double your account (or triple it).
A 5000-10,000$ account is still considered a small account and allows you to risk money that probably won’t destroy your life if you’ll end up losing it.
What ever you decide to do, don’t rush things. My advise is to not jump beyond tripling your account. There’s a huge difference, when it comes to trading psychology, between dealing with small positions and dealing with highly leveraged ones. If you’ll try to speed things up, you may end up back at square one trying to build your capital from scratch again
Once you’ll adjust yourself to realistic goals, you will find out that trading small accounts is a key milestone on your way towards successful trading career.
Don’t be fascinated with false advertisements and online stories about people that got rich from a 100$ account. In 99% of the cases that’s a blunt lie, and in 1%, it is a rare success story of extreme luck and several coincidences.