The Three Main Reasons Why You Need Capital to Build a Forex Trading Business

1.  Trading Capital
The most obvious monetary requirement comes from the fact that you need to seed your account with a certain amount of Capital to trade with.  The old adage, “It takes money to make money” is partially true here.  You cannot trade currencies without having at least some money of your own to begin with.  Fortunately, the ability to use “leverage”, explained below, means that the actual amount of money that you will require is far less than in most other businesses.

Some folks and services will tell you that you can open Forex trading accounts for as little as $1 to $50.  Does this mean that you can begin trading currencies with such a small amount?  The technical answer is yes, you can fund an account with say, $25 and begin trading.  The practical answer, however, is that the probability of you losing all of your money before you can build is practically 100%.  As such, there is a certain minimum amount of Forex funds that you must have to invest before you can comfortably trade Forex.

How much money will you need?  We will look at this in detail below in our discussion of leverage, but our recommendation here is to forego starting your official Forex trading business until you have at least $2,500 in Forex funds.

2.  Forex Education
As we explain on this website, you have a lot to learn before you can successfully trade currencies.  There is a pretty significant learning curve to overcome.  There are two ways to do this and both will cost you money.

First, you can do what “appears” to be the more cost efficient solution.  You can attempt to learn how to trade currencies from cheap or free resources on the Internet.  Yes, there are all sorts of free information on numerous websites that you can use to learn from.  Pick up a book on currency trading and you have what it takes to trade the Forex, right?  You can then begin trading on your own without the help of a mentor or trading room service.  Eventually, with experience, you might begin to develop your skills and trade consistently.  This will take time, however.  In the process, I guarantee you that you will lose a lot of money trading currencies as you discover what works and what does not work.

The better way is for you to engage in a process of intense education from the get go.  This will involve registering with competent Forex school and working through their program of study as an initial step.  You will then need to engage the services of a reputable Forex Mentor or trading room service.  This will ensure that you are applying all of the tools and techniques which you have learned efficiently.  It will also ensure that you are up to speed trading currencies in record time.  In doing this, you will save thousands of dollars that would most likely have been lost trading.

How much money is required?  Well, you can expect to pay anything from $200 to $1000 for a good trading education to begin with.  It all depends on the school you choose.  Often times, schools have promotional offers that can represent a very good savings to new Forex traders.

3.  Tools and Services
Depending on how you will trade currencies, you will need various tools and services.  At a very minimum, you will need have a brokerage account and a good charting service.  Your brokerage service will charge you money based upon the  number of trades you make.  With each trade you make, your broker will charge you an amount of money equal to the spread between the bid and ask price of the currency pair.

Charting services range from free introductory services to extremely expensive premium charting services.  For the most part, the free services provide most, if not all, of the necessary analysis tools that you will need to trade forex consistently.  Many traders, however, opt to use some of the more premium services available on the market today.

Expect to pay anywhere from $20 to $250 per month for these premium charting services.

Other services that you may want to consider:

1.  Mentorship programs which can run you from $50-$400 per month (Absolutely essential)
2.  Premium news services which cost $30-$100 per month.
3.  Forex Simulator which cost approximately $200 one time fee
4.  Forex Signal services which cost anywhere from zero to $300 per month.

So you can see that aside from your seed capital, you should have anywhere from $500 to $1500 to invest in your education at the inception and another $50-400 per month thereafter to pay for mentorship and services.

How Much Money do I Need to Trade Forex? The Power of Leverage

The above sets the stage for our analysis of exactly how much money you need before you can hope to trade Forex successfully.  There is one final concept which you need to understand first.  This is the concept of Leverage.

In the absence of leverage, if you have, say, $2,000 in your trading account, you would only be able to purchase $2,000 worth of any currency in the marketplace.  It would be hard to make lots of money with only such a small amount of money in the market.  Fortunately, Forex brokers allow you to trade with their money.  They will extend margin to you to allow you to trade currencies.  In the equities market, brokers allow this also, but their leverage is usually 2:1.  This means that they will allow you to trade $4000 worth of stock with a balance of $2,000 in your account.

In the Forex industry, brokers will give you as much as 500:1 leverage.  This means that you can purchase $1,000,000 worth of currency with a mere $2,000 in your trading account.  What this means as a practical matter is that even a small change in the price of a currency can produce a very large change in your profits.  Therefore, you can make (and lose) large amounts of money with only a small balance in your trading account.  Pretty neat, isn’t it.

Ok, now, lets discuss how much money you need to start.  To begin, lets consider your initial one-time costs for purchasing courseware, Forex simulators, etc a sunk cost.  What we want to do instead is determine what your monthly variable costs will be.

For purposes of illustration, lets say you incur the following monthly variable costs

Mentorship     $50.00
Charting         $25.00
News               $ 0.00
Total:              $75.00 per month

Now, in order to be profitable, you must be able to cover your monthly expenses and then some every month.  So you must earn at least $75.00 per month to break even.

Now, if we assume we can generate a return of 2.5% per month, then that return must amount to at least $75 per month.  This would mean you need to start off with an account of $3,000.00.  ($75 is 2.5% of $3,000).

If you spend more on mentorship, charting, news and other services, then you will need an even greater

Risk only funds you can afford to lose.
A final word about Forex funds.  Use only funds that you can afford to lose.  You will regret it otherwise.

Many folks are so excited about beginning their currency trading that they go out and take funds that they should not be taking to begin with.  Pulling money out of credit cards, selling family heirlooms or dipping into your children’s education fund is not only unwise, it will result in you losing money.  Without getting into an analysis of Forex Psychology, take it on faith that when the money you have invested is money you cannot afford to lose, you make different decisions in comparison to a situation where the money you have invested is “play money” that won’t really matter if you lose.  Trading currencies successfully is a challenge as it is.  Don’t make it harder by putting the extreme pressure upon yourself of being in a position where you cannot afford to lose.  Your emotions will get the better of you and your trading decision making will suffer.

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