One well-known reality is that a sizable portion of forex traders lose money. Even further, some websites and blogs claim that 70%, 80%, or even more than 90% of forex traders lose money and give up. There are forex traders who perform better than that, but it’s still difficult for rookie traders to advance in this market. It can take many years of learning and practice until you can make money trading forex. You may learn some of the most frequent reasons why forex traders lose money by looking over the list below. By doing so, you may be able to join the elusive group of profitable traders.
Top Reasons Why Forex Traders Lose Money
Getting to Know the Market
When a trend is identified, you understand the market and join it rather than trying to outperform it. However, if you try to take too much advantage of the market with too little money, it can knock you off your feet. Trading too aggressively or against trends is frequently a result of having the “beating the market” mindset, which is a surefire way to lose money.
Most currency traders initially try to find a means to reduce their debt or make quick money. Forex traders frequently urge you to trade with huge lot sizes and high leverage in order to achieve high profits on a modest amount of beginning cash.
It is feasible for you to create decent returns on modest capital in the near term, but you must have some cash to make any money. However, if you have little cash and excessive risk from using too much leverage, you may discover that you react emotionally to every upswing and downswing in the market, jumping in and out at the worst times.
By never trading with too little funds, you may avoid this problem. For someone looking to start trading on a tight budget, this restriction is a challenging issue to solve. If you want to trade relatively little, $1,000 is a reasonable amount to start with (micro lots or smaller). However, you should never in any circumstances trade forex with more than you can afford to lose.
Lack of Risk Management
As in life, risk management is essential to success as a forex trader. Even if you are a really experienced trader, inadequate risk management might still bankrupt you. The most important thing you need to do is safeguard what you already have, not earn money. Your capacity to turn a profit decreases when your capital is exhausted.
Place stop-loss orders and move them after you have a respectable profit to mitigate this hazard and practice sound risk management. Use sensible lot sizes based on the amount of money in your account. Most importantly, exit a transaction if it is no longer rational and you cannot sustain any more losses.
Being Too Greedy
Some traders believe they must extract every last penny from a market movement. Every day, money can be made trading forex. Holding positions for an excessive amount of time can lead to losing the profitable trade you are attempting to execute since you are trying to collect every last pip before a currency pair turns.
Being less greedy seems to be the apparent approach. There are plenty of pips available, so it’s OK to aim for a respectable profit. The next opportunity is just around the horizon, therefore there is no rush to grab the final pip since currencies are still moving every day.
When a transaction you open isn’t immediately profitable, you may occasionally experience trading regret, which causes you to start telling yourself that you made the wrong decision. Once your trade is closed and reversed, the market returns to moving in the way you originally intended. In that scenario, you must decide on and stick to a course. All of that back and forth moving will just cause you to steadily lose a small portion of your account at a time until your investment capital is exhausted. You can read about fomo trading and revenge trading to learn more.
No Trading Plan
Forex traders can also lose money in other ways. Well, having a bad attitude and not being ready for the current market conditions definitely contribute. Simply because it is, it is strongly recommended to approach financial trading as a type of business. A business strategy is required for each major commercial undertaking. Similar to this, a serious trader must devote time and energy to creating a comprehensive forex trading plan. A trading strategy should at the very least take into account ideal entry and exit points for transactions, risk/reward ratios, and money management guidelines.
Overtrading, or trading too much or too frequently, is the main cause of failure for Forex traders. Unreasonably high profit targets, market addiction, or insufficient capitalization can all contribute to overtrading. Traders who lose money pursue the price, which institutional traders never do. Exciting things can happen with forex trading. The market can be frantic and cause an adrenaline rush due to short-term trading intervals and volatile currency pairs. If the market takes a turn that is unexpected, it can also result in a great deal of worry.
Traders must enter the markets with a clear exit strategy in place to prevent this situation from occurring. Chasing the price is the reverse of this strategy and is more appropriately referred to as gambling than trading because it involves entering and canceling trades without a plan. Contrary to what some traders might want to think, they have almost no power or effect over the market. There will occasionally be a cap on the amount that can be taken from the market.
When these circumstances occur, wise traders will realize that some actions are not worthwhile pursuing and that the risks involved with a specific trade are too high. It is now appropriate to stop trading for the day and preserve the balance in your account. Tomorrow’s market will still be open, and new trade possibilities can materialize.
A trader will be closer to realizing a higher percentage of winning transactions the sooner they begin to view patience as a virtue rather than a weakness. Contrary to popular belief, there are instances when staying out of the market is the ideal strategy for making money as a Forex trader. When avoiding trading addiction, developing patience is more valuable than anything else.
Selecting Tops or Bottoms
Many beginning traders try to predict when currency pairings will turn. They will make a trade on a pair, and as it continues to move against them, they will add to their position because they are confident that the trend will soon reverse. If you trade that way, you wind up with significantly more exposure than you anticipated as well as a really bad trade.
Trading with the trend is recommended by many professionals. The prestige of having chosen one bottom out of ten attempts accurately is not worth it. Wait for confirmation of the trend change if you believe it will occur and want to place a trade in the new potential direction.
If you want to buy at the bottom, do so during an uptrend rather than a decline. Choose a peak when the market is making a corrective move higher rather than an upswing that is a part of a larger downturn if you want to open a position at the top.
Some trades are simply unsuccessful. Although it is in everyone’s instinct to want to be right, this isn’t always the case. Instead of holding on to the notion that you are always right and ending up with a trading account with no balance, traders must learn to accept that they are occasionally wrong and move on.
Even though it can be challenging, there are instances when you simply have to accept that you were wrong. Either you entered the deal for the incorrect reasons or things didn’t go as to plan. In any case, the best course of action is to acknowledge your error, cancel the transaction, and move on to the following opening.
The Forex market attracts two different types of traders. Those in the stock market and other financial markets are the first group. They switch to Forex to diversify their investments or look for better trading circumstances. The second group consists of retail investors who are making their first trades and have never done so previously. It makes sense that the first group had significantly more success in forex trading given their prior successes.
They are able to respond to inquiries from beginners like, “Why do Forex traders fail?” and “Why do all traders fail?” In terms of profitability, seasoned traders typically have reasonable expectations. Because of this approach, they avoid price chasing and violating the trading rules of their specific method, both of which are rarely profitable. Realistic expectations also help to reduce some of the anxiety that comes with trading. During a losing deal, some novice traders may become emotionally lost, which can result in a series of unwise choices.
First-time traders should keep in mind that Forex is not a quick way to get rich. There will be good and bad times, as well as risk and loss, just like in any business or professional career. A trader can rest easy knowing that their long-term performance won’t be harmed by one lost deal by limiting their market exposure each trade.
Remember that your biggest allies are perseverance and consistency. Traders don’t need to profit substantially from a single or a few large trades. This just serves to reinforce improper trading practices and can eventually result in substantial losses. The greatest approach is to achieve good compound outcomes with modest trades over several months and years.
Purchasing a Forex System
On the internet, there are numerous purported forex trading systems available for purchase. Some traders are scouring the market in search of the illusive, 100% accurate forex trading strategy. They continue purchasing systems and putting them to use until they ultimately give up and decide there is no chance of success.
You must acknowledge that there are no free lunches when you are a rookie trader. Like anything else, trading currencies successfully requires effort. Instead of purchasing useless methods online from dubious marketers, you can achieve success by developing your own method, plan, and system.
How to Stop Losing Money Trading Forex?
Trading too aggressive can cost forex traders money, especially when going against clear trends. Making lots of money should not be your first priority; instead, you should focus on protecting what you already have. Doubting yourself and hesitantly flipping between options won’t help you either. Try to keep your trading discipline and emotions in check. Knowing when you’ve been beaten is OK. You should have good forex money management in place to protect your trades and in the worst situation, be ready to eventually cut your losses short.
I think it is best to start trading on a forex demo account until you are consistently seeing good results. This way you can practice different trading strategies using virtual funds and not take any unnecessary risks. It can be a great way to learn about the fx market and learn from your mistakes without losing money. Once you have built up enough confidence and feel ready to do so, you can always make the seamless switch to a real live trading account.
You can get a free demo account from most forex brokers, including IC Markets who are my top choice for both manual and automated forex trading strategies. They have tight spreads, low fees and deep liquidity pools to ensure trades are executed at the best possible prices at all times. This is backed up by user-friendly trading platforms, convenient funding options and 24/7 customer support.
Many of the same problems that trouble investors in other asset classes also hamper FX traders. Building a relationship with other experienced forex traders who can impart to you the trading disciplines required by the asset class, including the risk and money management rules required to trade the forex market, is the simplest method to avoid some of these errors. Only after that will you be able to make wise plans and trade with return expectations that prevent you from taking unnecessary risks in exchange for possible rewards.
The ability to manage a trading account is one of the biggest criteria that distinguishes successful traders from unsuccessful ones, even though comprehending the macroeconomic, technical, and fundamental analyses required for forex trading is just as crucial as the necessary trading mindset. Making sure to have enough money, employing suitable transaction sizing, and reducing financial risk by adopting prudent leverage levels are all essential components of effective account management.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.