One commonly known fact is that a significant amount of forex traders fail. Various websites and blogs even go as far as to say that 70%, 80%, and even more than 90% of forex traders lose money and end up quitting. The forex website DailyFX found that many forex traders do better than that, but new traders still have a tough timing gaining ground in this market. Reviewing the following list will show you some of the most common reasons why forex traders lose money, and it can help you make it into that elusive percent of winning traders.
- Forex traders can lose money by trading too aggressively, particularly when bucking obvious trends.
- Your first, safest priority shouldn’t be gain but rather not losing what you already have.
- When you open a Forex trade, stick with it for a while. Second-guessing yourself and skittishly switching back and forth won’t get you far either.
- It's okay to know when you’re beaten. Be willing to eventually cut your losses in a worst-case scenario.
Befriending the Market
The market is not something you beat but something you understand and join when a trend is defined. At the same time, the market is something that can shake you out if you are trying to get too much from it with too little capital. Having the "beating the market" mindset often causes traders to trade too aggressively or to go against trends, which is a sure recipe for disaster.
Low Startup Capital
Most currency traders start out looking for a way to get out of debt or to make easy money. It is common for forex marketers to encourage you to trade large lot sizes and to use high leverage to generate large returns on a small amount of initial capital.
You must have some money to make some money, and it is possible for you to generate outstanding returns on limited capital in the short term. However, with only a small amount of capital and outsized risk because of too-high leverage, you will find yourself being emotional with each swing of the market's ups and downs and jumping in and out and the worst possible times.
You can resolve this issue by never trading with too little capital. This limitation is a difficult problem to get around for someone who wants to start trading on a shoestring. $1,000 is a reasonable amount to start with if you trade very small (micro lots or smaller). Otherwise, you are just setting yourself up for potential disaster.
Failure To Manage Risk
Risk management is key to survival as a forex trader, as it is in life. You can be a very skilled trader and still be wiped out by poor risk management. Your number-one job is not to make a profit but rather to protect what you have. As your capital gets depleted, your ability to make a profit is lost.
To counteract this threat and implement good risk management, place stop-loss orders, and move them once you have a reasonable profit. Use lot sizes that are reasonable, compared to your account capital. Most of all, if a trade no longer makes sense, get out of it.
Giving in to Greed
Some traders feel that they need to squeeze every last pip out of a move in the market. There is money to be made in the forex markets every day. Trying to grab every last pip before a currency pair turns can cause you to hold positions too long and set you up to lose the profitable trade that you are pursuing.
The solution seems obvious: don't be greedy. It's fine to shoot for a reasonable profit, but there are plenty of pips to go around. Currencies continue to move every day, so there is no need to get that last pip; the next opportunity is right around the corner.
Sometimes you might find yourself suffering from trading remorse, which happens when a trade that you open isn't immediately profitable, and you start saying to yourself that you picked the wrong direction. Then you close your trade and reverse it, only to see the market go back in the initial direction that you chose. In that case, you need to pick a direction and stick with it. All of that switching back and forth will just make you continually lose little bits of your account at a time until your investing capital is depleted.
Trying To Pick Tops or Bottoms
Many new traders try to pick turning points in currency pairs. They will place a trade on a pair, and as it keeps going in the wrong direction, they will continue to add to their position, sure that it is about to turn around soon. If you trade that way, you end up with much more exposure than you planned for, along with a terribly negative trade.
It's best to trade with the trend. It's not worth the bragging rights to know that you picked one bottom correctly out of 10 attempts. If you think the trend is going to change, and you want to take a trade in the new possible direction, wait for a confirmation on the trend change.
If you want to pick up a position at the bottom, pick up the bottom in an uptrend, not in a downtrend. If you want to open a position at the top, pick a top when the market is making a corrective move higher, not an uptrend that is part of a larger downtrend.
Refusing To Be Wrong
Some trades just don't work out. It is human nature to want to be right, but sometimes you just aren't. As a trader, you just have to accept that you're wrong sometimes and move on, instead of clinging to the idea of being right and ending up with a zero-balance trading account.
It is a difficult thing to do, but sometimes you just have to admit that you made a mistake. Either you entered the trade for the wrong reasons, or it just didn't work out the way you had planned. Either way, the best thing to do is to admit the mistake, dump the trade, and move on to the next opportunity.
Buying a System
There are many so-called forex trading systems for sale on the internet. Some traders are out there looking for the ever-elusive 100-percent accurate forex trading system. They keep buying systems and trying them until they finally give up, deciding that there is no way to win.
As a new trader, you must accept that there is no such thing as a free lunch. Winning at forex trading takes work, just like anything else. You can find success by building your method, strategy, and system instead of buying worthless systems on the internet from less-than-reputable marketers.
Frequently Asked Questions (FAQs)
What is forex trading?
"Forex" stands for "foreign exchange," and it refers to changing one currency into another. Forex trading is the trading of currencies on the foreign exchange market. The forex market is open 24 hours per day, Monday through Friday. Each currency has a three-letter code. For example, the U.S. dollar is USD.
What are pips in forex?
A pip is the smallest amount a currency quote can change. It's 1/100th of 1%, which is also known as a "basis point." It's a standardized unit. Currency pairs are typically quoted to the fourth decimal place so these differences can be measured accurately.