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A question that new traders often ask me is “How much money should I start out with?” The answer that I give is always “the minimum amount of money that will allow you to open a trading account, and follow the trades in your system, without compromising your money management rules”.
Most brokers will let you open an FX account with $5,000, and some even allow you to start with as little as $1000. The initial impulse of a trader is to put as much money as they can afford into the account. They know that many traders lose some or even all of their money in the market, but they “know” in their minds that they are smarter than all those who have come before them, and won’t make any of those mistakes.
I am speaking from experience, as this was exactly my attitude when I started trading. I learned many lessons very quickly – lessons I could have learned just as well on a smaller account.
The reason I suggest traders start with the minimum amount is because they have not yet been tested in the market, so they don’t know how they will react to the various scenarios the market throws at them.
I recall a parable that will be useful in elaborating my point. The story is about a man who went away and left his servants in charge of some of his money – the equivalent of a few months wages each. When the master returned, two of the servants had managed the money well, invested it wisely, and made good profits for their master. Because they had proven trustworthy in small matters, he rewarded them by giving them more money, and more responsibility.
The third servant had shown no initiative, and had buried his money in the ground in fear of losing it. When the master returned, he rebuked the servant, took the money from him, and gave it to the other servants.
The reason I tell this story is because EXACTLY the same thing happens in the markets.
If you manage your trading account wisely, follow the rules, and prove yourself trustworthy in small matters, the market can reward you. You can make good profits, your trading account can grow, and you can end up with more money to be responsible for.
Conversely, if you manage your money poorly, don’t follow rules, and don’t put in the necessary effort, the market will take your money, and give it to another trader, who had proven themselves worthy.
So before rushing into the market with a large trading account, why not stop and reflect on this story? It is far better to enter the market with a small account, and prove that you can be trusted with small things, than it is to enter the market with a large account, and find out that you weren’t ready for the responsibility.
Be Prepared!
Mathew Barnes
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