Why Forex Traders Lose Money
There is no accurate information about the percentage of the number of losing traders in the forex market. However, the majority of unverified online sources indicate that more than 90% of Forex traders will sooner or later join the losers camp. Yet the advertising phrases trying to lure many into joining this market circulate amid claims that “trading is not complicated”. But if it’s so easy to profit in this market, why do so many traders fail? In the following lines, let us analyze the reasons behind the poor performance of most forex traders.
Not with a proven strategy
All Forex traders know the importance of using a strategy that has been thoroughly tested and tried. However, few of them have the patience to test their strategy long enough. Currency pairs have been in an uptrend or downtrend for weeks, which offers an opportunity to make good profits using one of the trend-following strategies. But when the market enters a consolidation phase, this strategy starts to fail and can end up causing huge losses for the trader. For this reason, it is important that the strategy is tested in both turbulent and calm markets. Backtesting is not the final step in trying out the strategy as it is nothing more than a step to determine whether it is possible to use it in the market or not. After this phase, the strategy settings should be optimized and applied to real prices (whether via paper trading or demo account). Forex traders who lack the patience and strength to implement these steps will more and more often end up in the losing camp.
Low risk/reward ratio
There are always trading opportunities in the forex market. At least you can find two or more of the major currencies with clear trends to trade on their basis. However, you do not have to open all available trades unless you meet the appropriate risk-reward criteria. For example, if the currency pair is trading below a resistance level, it may be best to wait and enter after that resistance is broken. Opening the position before the actual breakout can result in losses in most cases, for example because there is a strong support level below the entry point. Applying the risk-reward criterion would have avoided a losing trade in this case, and thus any traders who neglect the importance of evaluating risk versus expected return also end up in the losing camp.
Do not use stop-loss orders
All traders, both professionals and beginners, know the importance of stop-loss orders. However, from a purely psychological point of view, it is somewhat difficult to apply this important tool in practice when trading the market. It is common for some traders to complain about hitting stops due to sudden price jumps. This is where the role of intelligent capital management comes into play. Only practice will allow the trader to determine the appropriate stop loss levels. But in any case, the importance of this important tool must not be overlooked. In other words, a forex trader who ignores placing stop-loss orders will sooner or later find that his account balance is at zero.
Abuse of Leverage
Forex brokers provide leverage primarily with the aim of increasing trading volume. However, the trader should use this dangerous tool with extreme caution and prudence. For example, trading a whole lot of EUR/USD with $500 equity would be a very risky venture as a price movement of 50 pips would result in the stop loss being hit. But if the same leverage, i.e. 1:200, is used to open multiple trades of 1 lot each, while the account balance is $10,000, the trader can work in a safe environment. Therefore, it can be said that Forex traders need to be careful when choosing their trade sizes and avoid falling into the trap of leverage abuse. If you don’t follow these tips, you’ll find yourself back in the ranks of the losers.
The trader should close their open position as soon as they realize that the prevailing trend is no longer in their favor. But in practice, this decision requires a kind of iron will, so that the trader does not hesitate for a second to close the deal. Greed gives the trader the false sense that they can wait indefinitely for things to turn in their favor. However, what happens in most cases is that the trend into the gcontinues slightly in the opposite direction and the trader only sees an increase in his losses. Before the trader regains consciousness and starts to control his nerves, the losses have already reached the level of the margin call, as the platform is late in starting to close the open positions. Likewise, a trader overwhelmed by feelings of greed may find it difficult to close out a winning trade at the right time. The trader is reluctant to close the deal and take profits even as he himself watches the currency pair hit one of the key resistance levels. Although the transaction can be successful, a sudden and rapid reversal in market direction can result in a significant reduction in profits. So it can be said that greed is one of the traits associated with losing traders.