A lot of beginning traders think that they have to day trade because they cannot afford to set a bigger swing trading stop loss. The biggest risk of only day trading is that it can easily lead to overtrading.
In Forex, you can swing trade with as little as $500 and still take 2% risk per trade, or less. This allows aspiring traders to develop their trading skills, without risking a large amount of money.
We will also compare the Forex market to what it takes to swing trade in other popular markets. Since it takes so much more money to swing trade in other markets, you may not believe that it's possible to have such a small swing trading account in Forex.
Let's take a look at the math of how this is possible.
The Math of Swing Trading with Nano Lots
Here's a theoretical trade that I'll use to illustrate the value of nano lots. This is an example of RSI divergence.
The risk on this trade is: 0.78083 – 0.74307 = 377.6 pips
Next, let's say that you risk 2% per trade. So with a $500 account, 2% risk is $10.
That's the most you are willing to lose on this trade.
377 pips may seem like a lot.
However, when you trade with nano lots, you can trade for as little as $0.0001 per pip. The cost per pip will vary, depending on which currency pair you trade.
But let's just use that as an example.
So to risk $10 on this trade, you would divide the dollar risk by the number of pips:
$10 total risk / 377.6 pips of risk = $0.026 risk per pip
From there, you divide the risk per pip on the trade by the cost per minimum lot size, which is 1 nano lot:
$0.026 risk per pip / $0.0001 risk per nano lot per pip = 260 nano lots
That gives you a trade size of 260 nano lots.
Take a minute to understand how powerful that is.
A nano lot has a pip value of $0.0001!
This is several orders of magnitude less risk than a micro lot, which I will explain in a second.
So this is how you can have a tiny $500 account and still swing trade with only 2% risk.
You can even trade a smaller account and only take 1% risk.
What if you have a $100 account?
Well, if you risk only 1%, then that's $1.
If you took the same trade with 377 pips of risk, you could still take the trade with 26 nano lots!
Even though this amount of money won't change your life in a significant way, it will get you in the habit of taking the right amount of risk and allows you to practice your trading strategy.
That's super important. When you use the right process on a small account, that will build the habit that will be very helpful in a larger account.
I know what you are probably thinking. This can be a lot of math to do manually, especially if the market is moving and you have a few trades to execute. That's why I love using TradingView.
Their trade entry screen does all the calculations for you, which makes it super easy. You can learn more about TradingView here.
The Math of Swing Trading with Micro Lots
Now let's compare taking that same trade, in the same account, but trading with micro lots. This is the smallest lot size at most Forex brokers.
It's 1,000 units of base currency and when you trade a micro lot, you gain or lose about $0.10 per pip. Again, the cost per pip will vary, depending on which currency pair you trade.
But for illustration purposes, let's just say that each pip is worth $0.10.
In a $500 account, with 2% risk, you are still risking $10.
However, with micro lots, you have a maximum stop loss size of 100 pips to only risk 2%.
$10 total risk / $0.10 per pip = 100 pips
Therefore, you would either have to pass on the trade, or take a lot more risk.
For this trade, you would have to trade 4 micro lots, which would mean that you would be risking about 8% of your account on the trade.
It won't be too many losing trades like that, before you blow out your account.
So if you open a $500 account and trade micro lots, that's actually very risky. However, if you use nano lots, you can take the right amount of risk relative to your account size.
…and the longer you hang around in trading, the more you will learn and the better you will get.
Swing Trading Forex vs Stocks
It's also useful to compare swing trading Forex to swing trading stocks, because the account size requirements are very different.
The first thing to consider when trading the US stock market is the Pattern Day Trader (PDT) rule.
Yes, we are talking about swing trading in this post, but if your swing trades don't work out and they turn into day trades, then the PDT rule will affect you. You could get stuck in a situation where you see a perfect trade setup, but you cannot take the trade because of PDT restrictions.
Therefore, it's useful to have more than $25,000 in your account, even if you are swing trading.
Even if you are super cautious and avoid the PDT rule, a small account will limit you to only a couple of trades at a time. If you only have $500 in your account, you can only really have one trade on a time.
…and consider commissions.
Most discount stock brokers will charge about $7 per trade. There are more “no commission” brokers like Robinhood coming out, but you are still going to pay a little spread with these brokers.
But for the sake of example, let's say that you are paying $14 per trade. That's 2.8% of a $500 account. It's going to very hard to turn a profit when you are already in a decent hole at the start of every trade.
So if you want to swing trade stocks, you will need at least $2,000 in your account, and a $10,000 account would be a much safer starting point. Since stock prices can vary a lot, it's better to be prepared with a bigger account.
Swing Trading Forex vs Futures
If you thought that the requirements to trade stocks are high, then swing trading futures requires even more capital. For example, let's take a look at a mini futures contract.
A popular one is the S&P E-mini. These are the specs from the CME website.
The important number here is the dollar value per tick. A tick is the smallest movement in that market, like a pip in Forex.
You're making or losing $12.50, every time the market moves!
In order to swing trade a market like this, you will need to have at least $50,000 in your trading account and more is better.
How Much Money Do You Need to Swing Trade For a Living?
This is the real reason you Googled this question, right?
So before I end this post, let's examine how big of an account you would need to swing trade for a living.
If anyone tells you that everyone needs $X to trade for a living, they don't know what they're talking about.
There are many variables that go into determining how much it takes to swing trade for a living, so it's impossible to have a blanket number that will work for everyone.
Here are the primary things to consider:
- Your base living expenses
- The lifestyle level you want to maintain
- Who else are you supporting?
- How much do you want to put into savings every month?
- What are other expenses that you would incur by trading full-time (medical insurance, etc.)?
- The reliability and return of your trading strategy
- How will you handle a trading drawdown?
The best thing that you can do is to have a reliable income, while you are learning to trade. Build your savings with your trading profits.
Once you are able to make 2-3 times your current income with trading, you can consider swing trading full-time. When it become obvious that you are losing money by going to work, then it's probably time to quit your job and trade.
…or maybe not.
You can always keep your job or even work a part-time job to have a reliable source of income. It just depends on your goals, what you feel comfortable with, and your other obligations.
The best place to start is by tracking your expenses. Remember to add some padding to account for emergencies. You may not realize how much you are spending.
On the flip side, you might not realize how low your monthly costs are. If this is the case for you, it will be much easier to replace your income with trading.
Swing trading can give traders freedom to only check the charts a few times a day. But many beginners are under the impression that they cannot swing trade because their account is too small.
While this might be true in other markets like the stock and the futures markets, Forex is unique in that you can trade nano lots and still take the correct amount of risk for your trading psychology, trading strategy and account size.