Ever wonder why traders lose money in Forex? Or, more precisely, why most retail traders have difficulties making a profit when trading Forex?
Lack of profit is not necessarily a Forex failure. However, the loss of capital is a failure, and retail traders, especially the ones trading for the first time, lose their capital most of the time.
Many reasons are behind such a terrible statistic. From insufficient trading education to lack of confidence and from overtrading to unrealistic expectations – it seems that everything that can go wrong, goes wrong.
The idea behind this article is to have a look at some of the reasons why Forex traders lose money in an attempt to help them identify the issues with the trading activity.
Reasons Why Traders Lose Money
Forex traders are drawn to the currency market because of its uniqueness. No day is the same, despite markets reacting to similar news or trading setups.
The unknown is the human behavior. The so-called market psychology changes daily as the inputs change as well. For instance, nowadays, manual traders follow robots (i.e., trading algorithms), but a couple of decades ago, it was the opposite.
As it seems, the players changed, but the market remains the same. The only thing different is that the trading execution increased, markets react faster, but the human element or the market psychology is still there.
Because of that, Forex traders are prone to make mistakes. Market psychology is to be found in almost all explanations why most traders fail – including the ones listed in this article.
Insufficient Starting Capital
To start with, the lack of trading capital often leads to Forex failure. Nowadays, a trader may open an account with a very small minimum deposit. Therefore, traders deposit $100 and expect to make $1000 in no time.
A close look at the desired performance shows that this is an increase of a thousand percent – unrealistic by all industry standards. Because of the small amount initially deposited, traders do not consider the risk of losing the money in the account. The reason is that losing the account doesn’t affect the bottom line, the trader’s standard of living – the amount is insignificant.
However, the more significant the amount traded, the more “skin in the game” the trader has, and the more responsible becomes. Therefore, the chances to survive in the trading game is to pay more attention to the markets. You can achieve that just by depositing an amount realistically correlated to the trading goal.
This is one of the primary reasons leading to a Forex loss. Everyone wants to get rich quick and fast and simply because the market is open traders feel the need to open positions. That’s not necessarily the best approach as it leads to overtrading the account.
The next thing you know, there’s little or no margin left in the trading account, and the slightest market move against the desired direction ends up with the trader losing the trading account.
It is said that “having no position is a position” when trading the currency market. It means that it is not mandatory to open a trade just because the markets are open. The market spends a lot of time consolidating, and patience is needed to avoid overtrading and stay disciplined.
Inability to Manage Risks
Trading means accepting losses. There’s no such thing as a trading strategy that wins every single trade. Instead, there is a thing called money management that helps traders navigate the volatile currency market.
One of the main reasons why most traders fail, is the lack of risk management. Getting accustomed to what makes a sound money management system is the first step to avoid losing money when trading.
Forex traders that trade for a living use risk-reward ratios and a trading volume correlated with the size of the trading account. For instance, trading one lot on a thousand dollar account doesn’t sound like a wise move as each pip represents the equivalent of ten dollars. If the market moves against the desired direction, even ten pips, the account has lost ten percent of its value. The risk was wrongly set.
Drawdown levels also help Forex traders. It is said that a drawdown or more than thirty percent makes the trading strategy questionable. Therefore, to better manage the risk, use a trading volume that doesn’t lead to such drawdowns in the worse case scenario in which the strategy underperforms.
Not Having a Trading Plan
The lack of a trading plan leaves everything to faith. If that’s the case, Forex traders aren’t in control anymore, and trading becomes closer to gambling rather than speculating.
But the sole existence of a trading plan doesn’t guarantee success in trading. Some traders simply can’t follow the trading plan, lacking the proper execution.
Human nature, it seems, represented by fear and greed, is responsible for the failure of executing a trading plan. For this reason, successful traders have a strong set of rules regarding what to do and what to avoid when trading the currency market.
A plan always helps. Traders consider the economic calendar for the period ahead, the technical picture of the markets to trade, and then the proper execution. As always, the best approach is to let the market coming to you – meaning using pending orders, the proof that a trading plan is in place.
High or unrealistic expectations kill a trading account. It is OK to wish to make a hundred percent a year, but unrealistic.
How about twenty-percent per year and compound the outcome for several years? By doing the math, you’ll find out what successful Forex traders know for years – profitable trading comes as a result of planning, executing, setting the right goals, and keeping it real.
Retail traders must deal with human nature flaws each day the markets are open. Just think of the fact that the probabilities are very high that from the moment a trader opens a position, the market will go against it.
Therefore, it is crucial to know that. Also, to know that losses do occur, but it is more important to be part of the trading plan. It is OK to lose a trade or more, if you use a risk-reward ratio of 1:3, for example (i.e., meaning you risk one pip to make three).
A trading plan helps avoid overtrading, and it proves the existence of a money management system. They all come in handy for Forex traders that seek to survive trading financial markets.
As a true partner to its customers, FXOpen strives for transparency and aims to educate its traders. It is the only way to build a strong relationship and to avoid losses. Find out here the types of trading accounts offered, and which one suits your trading needs best.