How Much Should You Spend to Trade Forex

Forex is probably one of the few places where you can start with as little as a couple hundred dollars and have a chance to make money. What's more you can get all kinds of free information on how to trade at the library, the bookstore, and on the Internet. In fact, if you don't want to learn about Forex you can get online and type "automated trading systems" and millions of hits. You will be assured when you do that you do not need to know anything to trade Forex. Just buy an automated system and the world is yours. In fact, you could buy a system one day, and start trading the next. You can put $10,000 into an account on Monday and by Friday you could have $100,000!

If you have not guessed, I am getting ready to sell you the Brooklyn Bridge!

The money that flows through the Forex market equals the Gross Domestic Product of the United States in less than 5 days which is around $14 trillion. That is like a Mississippi River of money running through your computer each day. All you need to do is to know when to stick your hand in and when to pull it out. There is one problem however, that 95% of the people trading Forex lose money. When they stick their hand in they come back with nothing.

That being the case then everything we described above must not be true. Why?

There are several reasons. The first is that many, many people believe the hype about automated trading systems. When you read the sales pitches there is no information about how the system trades, only about how successful it is. Most new Forex wannabe traders don't care however, they just want to get rich.

Suppose for a moment that some of the automated systems were good, how many would that be? If only 5% of people are making money in Forex, and everyone trading Forex were trading with automated systems, which of course they are not, then only 5% of the systems would be any good. You would only have a 1 and 20 chance of picking out the right system. Not to mention that most traders who use automated trading system know nothing about trading so it would like sending your 12 year old son or daughter to buy a car. If Forex were this easy you couldn't walk down the street without hearing someone talking about it and how easy it was to make money. It would be like the gold rushes of the Old West.

This first group of hopeful Forex traders only spends a few hundred dollars for their system but the dollar amount they put into a trading account could be significantly more. The loss could be a few hundred dollars or thousands. They usually leave the market after on short trip.

Forex is a highly competitive business. To use our analogy of the Mississippi, the river boat captains know the river because they've been on the river most of their lives. The same is true for the professionals that trade Forex. They eat and breathe their job because if they don't, there is a good chance there is someone in the wings waiting to take their account away. You aren't going to succeed using an automated system developed by a graduate of Harvard or MIT, genius or not.

The second group of traders may include some of the first group who are wounded. They went the automated route or were scammed in some other way. They however realize the financial opportunity and decide to spend money on a Forex course. They do some research and plop down several thousand dollars. Most of these courses teach no more than could be learned by reading two to three good books that might cost $50 each. Most traders who buy into the educational course idea are on the right track. However, what you learn for thousands of dollars will not teach you to trade successfully. Trust me, I have been there.

So how can you succeed?

1. You should set aside a minimum of $500 to educate yourself. This would primarily be books that you would read.

2. You should find a mentor who trades a system that makes sense from an objective and empirical point of view.

3. Personally I agree with David Aronson who wrote, Evidenced-based Technical Analysis, and stay away from time-money wasters that are subjective trading methods that make meaningless claims but give the illusion of cognitive content. These methods make predictions that are impossible to measure. Examples would be: Classical chart pattern analysis, hand-drawn trend lines, Elliott Wave Principles, Gann pattern analysis, price action, even Fibonacci, etc. I am sure I stepped on some toes there but these systems are all subjective and base their success on cherry-picked examples and results.

4. Until you can find a system that is not subjective, then you should not trade. The riverboat captains of the large banks and hedge funds you are trading against are not trading any of the above methods. You shouldn't either.

5. You will find a system and when you do you should evaluate what that system will mean to you financially over the next 3, 5, 10 years or whatever period of time you plan to use it. If you plan to turn your $10,000 into $100,000 in 3 years than several thousand dollars for a solid trading system is not too much to spend.

6. It is better to put a small amount of money in a trading account and trade small amounts of money until you become adept with your system, then to spend too much money on a trading system and put less money in your account.

Deciding to trade Forex should be an investment. Learning a system will take time, but the better educated you are the better prepared you will be to stick your hand into the Mississippi River of money flowing by and come out with a fistful.