A common fact about forex traders is that many of them fail. Many websites and blogs claim that 70%, 80%, and even more than 90% of forex traders lose money and quit. DailyFX found that many traders outperform that number, but new ones still have a hard time breaking into this market.1 The following list will show you some of the most common reasons why forex traders lose money, and it can help you join the elusive percent of winners.
- Forex traders who trade too aggressively, especially when bucking obvious trends, can lose money.
- Your first and most important priority should not be to gain more, but rather to avoid losing what you already have.
- When you open a Forex trade, commit to it for a period of time. Doubting yourself and skittishly switching back and forth will also get you nowhere.
- It’s fine to recognise when you’ve been beaten. In the worst-case scenario, be prepared to cut your losses.
Over trading from being overly confident
Novice traders tend to be over-traded. What does that imply? This simply implies that they buy and sell currency too often. You don’t even realise you’re over-trading, which is why it is harder to diagnose this issue. Just so you know, the world’s best traders have a great deal of patience, in the sense that in a short period of time, they don’t place too many trades. When the opportunity arises, they don’t jump into the trade.
You are not managing risk properly
This one is pretty obvious, but because so many traders do not properly manage risk, it is important to discuss it. Not managing risk is a sure-fire way to lose money on the market on every trade you take.
If you need more ‘evidence’ other than my views on this matter, check out a recent article I wrote called 28 motivational trading quotes, in which article you will find many quotes on the importance of risk management in trading from other professional traders.
To put it simply, you are never going to make money if you don’t know your personal risk tolerance per trade, which is the amount you are personally OK with potentially losing per trade. In addition, even if you DO know that amount, but you don’t stick to it on EVERY trade you take, you’re not going to trade cash either.
Money is needed to make money. This translates into the fact that in order to become wealthy, you have to invest a significant sum of money. Right now, what you need is trading capital. With a limited amount of starting capital, you can achieve a substantial profit by speculating on the price of financial assets. However, with a leverage of 1:1000 or higher, you can trade in the foreign exchange market. The FX market is already highly leveraged, so the problem could be caused by insufficient capitalization.
Not adapting to market conditions
Getting started in foreign currency exchange is not as complicated as staying profitable. All you have to do is open a trading account and place your first order with one of the many brokerage companies. It is necessary to adjust to the ever-changing market conditions to attain consistent profits. Basically, you have to adjust your trading strategy to the different conditions of the market. If you don’t do that, you’re going to under-perform. In terms of profitability, think. During the summer months, when volatility is higher, the foreign exchange market tends to vary.
Being motivated by greed
It is difficult for Forex traders to take the emotion out of trading. They let greed get the best of them sometimes. It is not a good idea to give in to greed. So, don’t try to squeeze out a move on every pip. With every purchase or sale order you place, if you try to get rich, you will most certainly end up blowing up your trading account. It’s better to slowly take things in. Aiming for a fair profit. Currencies continue to change, which means there’s no need to get that last pip. When the market moves against the traders, things may easily get out of hand.
Befriending the Market
The market is something to understand and join when a trend is established, not something to beat. At the same time, the market can shake you up if you try to get too much out of it with too little capital. The “beating the market” mindset frequently leads traders to trade too aggressively or against trends, which is a sure recipe for disaster.
Low Start-Up Capital
Most currency traders start by looking for a way out of debt or to make quick money. Forex marketers frequently encourage you to trade large lot sizes and use high leverage in order to generate large returns on a small amount of initial capital.
You need money to make money, and it is possible to generate excellent returns on limited capital in the short term. However, with only a small amount of capital and outsized risk due to excessive leverage, you will become emotionally involved with each swing of the market’s ups and downs, as well as jumping in and out at the worst possible times. 2
You can avoid this problem by never trading with lack of capital. This is a difficult problem to overcome for someone who wants to start trading on the cheap. If you are just starting out, $1,000 is a good starting point (micro lots or smaller). Otherwise, you’re just setting yourself up for failure.