Just like most countries around the world, forex trading is considered a lucrative investment option in India nowadays. However, as more people are joining the field, they are facing many issues due to the lack of proper knowledge and resources. Not to mention, the government laws are not always in the favour of traders. You may visit the website of RBI or SEBI to know more about the rules and know which brokers you can go for. To visit SEBI, click on this link: https://www.sebi.gov.in/.
While most people think the first step is to look for a decent broker, the reality is a bit different. For a more practical approach, it is essential to save money first to invest.
Now, the question is what the minimum investment in forex trading in India is. A common mistake is to think that the amount of minimum deposit is enough to start the journey, but there is more to it.
The Minimum Investment Amount
When it comes to brokers, many companies set an initial deposit of $100 to open a live account. Some firms also offer accounts for a $500 minimum deposit. So, it would not be wrong to say that you can start trading if you have a capital of $500.
However, there are several other concerns you need to consider, such as fees and commissions, trading strategies, leverage, risk management, and more –
- Risk Percentage
It is never recommended for new traders to risk more than 1% of the total amount in the account. Nevertheless, they must have flexibility. There is nothing assured in this field. So, even pro individuals may face losses, and it is even more applicable for novice traders. Therefore, you need to make sure that your losing streak does not cut down your capital too much. This is only possible by keeping each trade risk low. It is absolutely a must to keep your risk around 1% of the total capital because it is very hard to recover a huge drawdown and capital loss. All this directs to one simple rule – you must start with a capital at least 100 times greater than what the maximum risk in your trades is.
- Pips and Lots
The market is filled with price fluctuations, which you can assess using the last decimal point in the exchange rate. As you must already know, four decimal points are used to price most currency pairs. For instance, if the GBPUSD is priced at 1.3435 and you notice it move up to 1.3437, you can say that it has moved 2 pips. Similarly, it would be a 100-pip move if the price reaches 1.3537.
Forex allows 1K, 10K, and 100K units to trade currency pairs. Respectively, these units are known as micro, mini, and standard lots. A beginner, who has smaller capitals, usually trades micro lots. In pairings, where the USD is listed second, the value of a pip is always $0.0001. So, if you trade micro lots, you will gain or lose $0.10 from one pip of movement. The pip value depends on the second listed currency in other pairings as well.
Pip value is also involved with stop loss order, which is an essential part of risk management. You must apply it to your trades if you do not want your account to be wiped out. The trader needs to set a stop loss while executing a trade to decrease the loss in case the base currency value moves in the opposite direction of what the trader predicted. If you expect the price to increase, you need to set the stop loss 10 pips below the current price and if you think that the price will decrease, it has to be set 10 pips above the current price.
- Trading Expenses
Commissions are most probably the biggest expense a trader needs to be concerned about. No matter which broker you choose, you will have to pay some fees and commissions in order to execute a trade. Even if you find a broker that does not charge commissions, there can be other types of fees such as conversion fee, withdrawal fee, overnight fee, inactivity fee, and more. Apart from the fees and commissions, other trading expenses include the cost of internet, trading software, and training. If you are making more than 100 transactions every month, then the commissions may vary widely depending on the brokerage firm.
- Leverage and Margin Trading
Leverage trading allows a trader to open large deals with a comparatively small amount of investment. To put it simply, it enhances the trading power of an account. However, it also increases your risk. When you apply leverage to your trade, both successful and unsuccessful deals can be intensified. For example, assume that you are investing $100 in EURUSD. Now, by applying a leverage of 1:400, you can open a position that is 400 times of your actual investment. It means that you are opening a deal of $40,000 with $100 only.
Now that you know what leverage is, let’s concentrate on margin. Margin stands for the funds a trader needs to have in their account to open a certain position. It not only allows you to open large positions with small investment but also acts as collateral to cover losses. As mentioned in the example above, you can open the $40,000 deal with a 0.25% margin that is $100.
Leverage trading may seem like a great opportunity for people to start trading with low capital in their accounts, but it has high risks. Indeed, you can gain more than you are investing, but similarly, you can also lose it all. Once the account is wiped out and you do not have any capital left to execute another trade, you will be missing opportunities automatically. So, it is essential to have sufficient money in the account before you place a trade.
- Problems of Starting Trading with a Small Account
If you start trading with a very small account, you may face these problems –
- Insignificant gains: If you gain only a few dollars even after hard work and good decision making, it may lead to frustration because you could have made more if you could trade more units. This thought process may make you break the 1% risk rule and you may end up losing all your money.
- Limitation to day trading: A stop loss of 10 pips is good for day trading, but a trader may want to take a different approach. Swing trading is preferred by many to gain from long-term movements. However, it requires a higher stop-loss, which is not possible with a small account.
- Higher cost-per-trade: When you have a small balance, your cost-per-trade gets higher. Most brokers charge traders with larger accounts less per trade. With higher fees, it is very difficult to make profits even if you are winning trades.
Conclusion
You cannot consider only one factor while deciding minimum investment in trading. What you need to understand is you must have enough money in the account to place a new trade even when you are losing. Judging all factors, it is recommended to be ready to invest at least $5000 if you are a novice trader.
However, if you are in the market for a few years and call yourself a professional, then you must know that stocks generally trade in round lots. So, you may need to order at least 100 shares at once. If each stock is priced at $60, you will need a minimum $6,000 in your account. Bonds, however, trade on a basis of per bond, with a face value of $1,000 each. So, to order 10 bonds, you need $10,000. All other expenses add up to this as well.
So, as a professional trader, your minimum investment to start trading in India should be $25,000.