Why Forex Traders Lose Money and how to fix it
Forex traders lose money…everybody knows that, right? Well, this post will very much relates to you and any forex trader. Regardless if you trade futures, stocks or forex, most traders simply lose money whilst trading. So aren’t you curious why this is a fact? Starting in the early 90’s with stock trading I still remember the first winning trades but it was more luck than anything else. As most beginners I gained some profit but it had nothing to do with knowledge. Statistics show that over 80% of all forex traders lose money and quits trading. Especially new traders struggle a lot to become profitable. This post I wrote to help new forex traders understand more about the pitfalls of forex trading.
To make it easy I summed up the 10 most important reasons why forex traders lose:
1. Lack of knowledge
This is probably the no 1. reason why a forex traders lose money. I trade for over twenty years and still make errors. So how come people think they can beat the market after looking at a one hour webinar. Now if you go back to your youth most people remember making mistakes that hurt you. Either a slap from your parents or when you fell off your bike. The same rule applies for forex trading. If a bad trade doesn’t hurt, you will usually forget about it and do it again. So to start your trading career we have the following tips:
Only use a demo account for practicing orders – like stop loss, trailing stop, limit orders etc.
Once you did that open a live account with a very small deposit ($100 – $500)
How to fix:
- before start trading forex try to read about “the big picture”. There are numerous sites where you can find a lot of information.
- read about success stories from professional forex traders, they can give a lot of insight.
- try to follow signals. Many sites (like ours) offer free trading signals.
2. Small budget
In case you play poker you know that you cannot go to a poker game without enough cash. What if a player goes all in and you hold a Royal Flush with just a few chips on the table. This is exactly what happens with forex trading. In some cases the markets can be “predicted” with a high chance of being right. So you place a higher bet!
If Donald Trump would be sent to jail wouldn’t you agree that this is bad for the US dollar? I know what I would do. Go all in shorting the dollar. But if you just lost 80% of your $1K account you can only trade with $200 and probably not recover your losses.
So how much money do I need to trade forex?
This totally depends on your trading objectives and trading style. If you want to work on a pension and start with $500, it will not work. If you start with $2,000 and trade full lots on a daily basis, it will not work either. Just try to not make too many trades and use the H1 H4 or Daily charts. This will probably give you more peace of mind.
How to fix:
Iam afraid this can only be fixed by funding your account with more money. A small budget is not a guaranteed loss, but absolutely limits your chances.
Probably the only reason why brokers started to become market makers. Leverage means that you speculate with money that you actually don’t own. Even worse, you pay interest on it once you hold positions over night. Over the total amount! This swap will eat your profit very slowly but consistently. If you add the swap and extreme leverage to your trading you have a toxic mix of a sure loss.
Lets assume you have a $1K trading account using a 1:400 leverage. This basically means that you can do a trade for 400.000 units of a currency (without the currency exchange rates). Now lets have a closer look at a 5 minute chart..
This spike of just 10 pips will blow your short position from the charts. 10 pips means $400 loss in this example. So make sure you use small bet sizes and only raise the stakes if your win chances seem bigger.
How to fix:
Try to not use more than 3% of your account size per position. For example: if you have an account size of $3000, than try not to bet more than $90. So a 1:100 leverage means an approx. 0.3 lot size with a 30 pip SL.
4. No money management
Money management is not popular and an important reason why forex traders lose. Especially beginners do not seem to care about stop losses. So besides a correct lot size its also important to use a stop loss. Another tool that might help you is a trailing stop. This allows you to follow a trend longer without having to monitor the position.
How to fix:
- Always use a stop loss and take profit. It prevents from experience large losing trades or profits which vaporize because of retracing markets.
- You might consider to automate your trading. A forex robot does exactly as you program it.
5. Admit to be wrong
This reason very much relates to the previous one. A wrong trade is a wrong trade. Deal with it. That is why we always check data such as average winner vs average loser. This proofs if a strategy cuts its losses in time. Most traders take small gains and let the losers run. Forex trading is not a marriage, just admit that you are wrong in a trade.
How to fix:
A losing trade will happen and its pointless to stick your head in the sand. Don’t fear to be wrong, even the best forex traders will be wrong too from time to time. It’s part of the game.
6. Fear Greed revenge: Emotions
Its common knowledge that emotions will not help you as a forex trader. Fear will probable lead into leaving a good trade too soon. Greed will probably make you exit a trade where you could have made more pips. Its not for no reason why I know that these enemies of any trader are hard to beat. Maybe you want to read what the best forex robot can do for you. Test it for free in case you admit that fear and greed causes losses.
Revenge is a terrible emotion we can feel. If you act on it whilst trading it mostly brings destruction of your trading account. However, whereas a person may not take revenge in their general day to day living, they may do when it comes to trading.
Immediately after a losing trade. Your stop was just hit by 2 points overnight after which price soared in your desired direction. You are furious and incredulous in equal measure. When you are angry after a losing trade. Depending on your constitution you express your anger, either a clenched fist that bangs the desk, a revised eyebrow, or an increase of your heart rate. You scan the news feeds furiously looking for another trade. You find one and you are stopped out. You are even angrier, and you increase your leverage and take another trade. I hope you get the idea about this circle of doom!
How to fix:
This is for many forex traders the most important reason to switch to robot trading. Since emotions will never help you whilst trading. In case you are not able to switch your emotions off, we recommend to either automate your trading or to simply quit trading.
7. No trading plan
Imagine you fire up your platform just before the trading session. What is your plan? When and why will you decide to make a forex trade? Or are you just randomly clicking the mouse and see what happens. Many traders end up buying tops and selling bottoms and therefore lose trust in their forex trading skills. A trading plan is eminent for making consistent profits in the forex markets. So before you enter a trade, it really helps if you exactly know why you are making this trade. In case you need help with this, we are more than happy to assist. you.
The chart shows which risk (red) you are willing to take vs the profit (green)
How to fix:
Make a trading plan and always use Stops and Limits
A useful guide for a good trading plan is to watch the reward/risk ration for each trade. Now for humans its common to hold losses long and take profits early. So by creating a good plan you should try to overcome these emotions by using strict stop losses and limit orders. A 1:1 risk reward ration is a good start.
A plan like this we call a good monay management in your account. In case you have difficulties finding good entries, there are many resources to find signals or trading tips.
8. No time
Any idea how much time a professional forex trader spends on trading every day? Guess what… it s as much as you spend in a day job. So why is it that retail traders think that with just 15 minutes of reading and a mobile device they can make consistent profits. Being a forex trader is not easy and requires time and consistency. Forex markets are constantly changing so good information is needed to make responsible forex trades.
Even when you have the time to read about the markets, you still need time to enter a forex trader correctly. Don’t be sad, as most of the traders, they are not gonna be a professional forex trader… ever. But still, if using the right strategy it is possible to make steady profits. It’s just a matter of finding this trading strategy.
How to fix:
No time for trading means you can’t know whats going on in the forex markets, nor that you can adjust open trades. Most traders lacking time will experience a loss.
- Consider to let your account being managed by a forex pro
- Using a forex robot
- Trade in a MAM account
- Social trading
- Invest in a forex fund or currency ETF
9. Wrong broker
Seriously? You sent money to a friendly guy over the phone that told you how to become rich? Nuff said… Or did you click on a 100% deposit bonus banner? Brokerage business is very profitable. A forex trader should therefore check execution prices, regulation, support, withdrawal policy, platform etc.
Complaining about your broker is also lack on knowledge. There are plenty of authorized websites where you can check real reviews. Or go on forums to see what other clients have to say about certain brokers. The internet is the perfect tool for this. And believe it or not, there are still many brokers that prefer a fair play business model.
How to fix:
- Look for broker reviews on unbiased websites
- See if the broker is black listed on a regulators website
- Contact them and ask critical questions
- Make sure the broker is regulated and EA friendly
10. Purchasing the wrong trading strategy
Don’t worry cowboy, I am not gonna promote any of our Expert Advisors. We follow the basic rules before trading any strategy. So instead of believing any Holy Grail EA stories, just use your common sense. If it looks too good to be true, it probably is. You can read one of our other blog post where we outline the basic rules before using any forex trading strategy.. Click here to read it.
How to fix:
Read this blog post which describes if EAs really work
I know that forex traders lose over the long term and for most of them there is not much new to this information. So hopefully this was again a reminder that forex trading is fun, dynamic but still risky. But hey, there is hope.. Some traders are able to consistently beat the markets. It needs effort to overcome the common mistakes that forex traders make. Now our website claims to have good automated strategies, but we are always here to help you out. Also in case you are a manual trader.
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