According to research in South Africa, the consensus in the Forex market is that 70% to 80% of all beginner Forex traders lose money and end up quitting. These 10 reasons that most Forex traders lose money were compiled by our researchers to keep you from becoming a statistic.
Most Forex traders fail. This is fact. As stated, the consensus on the conservative side is that 70% to 80% of all Forex traders lose money and this number can go as high as 90%!
Any kind of trading, and especially Forex trading, requires a lot of dedication to learning how to trade and developing a solid foundation of Forex knowledge.
The experience and confidence to be able to apply this Forex knowledge in real time trading, in a volatile and unpredictable market, takes time.
And even still, mistakes will be made because real life lessons and failures are your best teachers.
Hopefully in this article you can learn to avoid the major pitfalls that most traders make and learn from their mistakes.
Insufficient start-up capital
Many new Forex traders are already starting on the back foot. They begin Forex trading because they need more revenue and hope Forex will be a quick and easy way to make large profits.
This is exacerbated by Forex marketers encouraging beginners to trade using high leverages by promising the potential of big returns for a small amount of initial capital.
This is very risky and the surest way for you to lose all your capital very quickly.
Slow and steady wins the race in Forex trading.
With this calculated approach, you need to have a decent amount of capital to start with in order to make profits worth your while AND still minimise your risk.
One thousand dollars is a decent amount to start with if you trade micro lots. Otherwise, you are just setting yourself up for potential disaster.
If you do not have these kinds of funds, it may be worth it to save until you do and in the meantime hone your skills with a demo account and educational Forex material until you are ready to start trading live.
Beginner Forex traders should risk no more than 1% of their capital per trade. Trading with any more capital than this increases the chances of making substantial losses.
You can increase that to 2% as you become a more experienced trader, but you never want to trade with a substantial amount of your capital in one trade.
I am not saying that you shouldn’t take advantage of the Forex market’s availability of high leverage.
This is one of the strong advantages that is available and offered to Forex traders in this market.
I am saying that it would be wise to understand fully and responsibly, how to use this leverage while making sure you have a solid risk management strategy in place.
Otherwise Forex trading is tantamount to gambling.
It is important to mention that a small trade size is not the only way to limit your risk.
Regardless of your level of trading skill and expertise, all Forex trading strategies should make use of stop-losses to mitigate the risk.
A responsible use of leverage while trading in lower volumes is a great way to make sure that your trading account has enough capital for the long-term.
Poor Risk Management
Poor risk management, and even worse, no risk management is a major reason why Forex traders lose their money quickly.
Risk management is key to survival in Forex trading including day trading. You can be a good trader and still be wiped out by poor risk management.
You need to not only make sure you are following a sound Forex trading plan to make a profit, but more importantly you want to minimise losses so that you can keep the capital you have.
Trading platforms are equipped with automatic take-profit and stop-loss mechanisms for a reason. Make use of them!
Doing this will dramatically improve your chances of success.
As a Forex trader, you need to know how to implement stop losses and take profit mechanisms properly depending on the market’s conditions at the time of your trade.
Not accepting responsibility for losses and mistakes
In Forex day trading there is absolutely no room for the blame game. Accepting responsibility for your losses and Forex trading mistakes is the MOST important lesson you can learn.
By accepting responsibility, you will not waste time and energy blaming anyone, but rather pick yourself up after losses – after all they are guaranteed to happen.
Rather decide to move forward or cut your losses quickly or whatever you need to do in the circumstance you find yourself in.
A big reason many Forex traders fail to make money is they will not take full responsibility for the outcomes of their trades and take the steps to do something about it.
Over-trading is one of the most common things in Forex trading preventing you from making money.
Forex traders who spontaneously jump in and out of the market and who are indecisive in their trading will not only lose trades, but they will rack up a lot more fees via spreads and (or) commissions.
A Forex trader does not have to make a lot of trades to be successful, you just need to make the correct trades.
This is why a Forex trading strategy is crucial and being able to recognise the right conditions in order to make a trade. And this applies to day trading as well.
Risking too much
Trading is NOT gambling. Full stop.
Never invest more than 2% of your available capital on any individual Forex trade. Doing so puts you at significant risk of loss.
Rather, spread your investments over a wide number of trades so that you limit your overall losses.
If you have a good Forex trading strategy, there is no reason to risk too much on a single trade.
The only time you should increase your risk per Forex trade is when your account value increases.
Do not trade on “feelings”. Keep emotion out of your Forex trading life.
Poor Forex trade management / no trade management
This is not about following a trading plan and knowing when to enter the Forex trade. After you enter the trade is when the hard part starts.
Shockingly most Forex traders have no Forex trade management plan, either out of ignorance or because they think they need to do it alone.
But it is hubris to take this stance and you will be hurting your Forex career if you think that you will just react the right way even when there is a lot of pressure.
It is only logical that when you have something especially important on the line, like money, people act differently, more emotionally.
By having a clear trade management plan which includes when to open a trade, when to close it, your minimum risk to reward ratio, the percentage you are willing to risk of your account value and so much more.
When you are tempted to go on instinct or react emotionally you will be disciplined to follow the plan.
Not having a trading strategy
Anyone that wants to trade in Forex needs to develop a trading strategy or set of strategies including proper risk and money management.
If you do not have a solid Forex trading strategy, then don’t trade. Rather go to Vegas and gamble.
It is absolutely crucial that you have an effective trading strategy that you are confident in and know how to recognize and apply.
Do not just pick a Forex trading strategy. Actually, spend the time to learn it and master it.
Having a trading strategy will really provide you with the edge you need so you are not distracted by feeling or seeing other patterns or market movements that may not actually be there.
Whether it is day trading, a buy and hold strategy, fundamental analysis, or any other strategy, you must put in time and effort to get the Forex education required to know them well.
Always keep in mind that being a successful trader means you should be consistently making money in the Forex market.
This can only happen if you develop the discipline and good habits to win trades consistently.
Forex trading success is measured by your consistency and this can only happen if you are trading dependably by applying and knowing your trading strategy and the factors around this.
Forex is not a get rich quick scheme. The only way to be successful and have longevity in the Forex market is to develop patience and consistency.
Forex traders should not be looking to make a lot of money in a couple of big trades. This will certainly lead to big losses over time.
Knowing how to make smart, smaller trades every day over time is the best option.
You also have to resign yourself to the fact that losses WILL happen. No one wins all the time. Not even the best Forex traders always win their trades.
What they do, however, is accept losses and cut them as quick as possible to minimise risk and loss and move ahead.
Forex trading is a marathon, not a sprint and your overall performance over the long term is much more important then what happens on one single day.
Just make sure to minimise your market exposure per trade, so that you can have the capital to trade again another day.
Yes, you can get addicted to Forex trading and day trading, much like you can get addicted to anything else.
Forex day trading particularly brings with it a lot of excitement and a rush of adrenaline, as well as big highs when you win a trade, as well as lows when you lose.
This emotional roller coaster can be seriously addictive. This Forex trading addiction can cause you to lose money as you start to chase the price and get caught up in the excitement and emotion.
Once again, this is why traders need to enter the market with a clear exit strategy if things are not going their way.
Chasing the price, which is opening and closing trades with no plan, is the opposite of this approach, and is not trading. It is gambling.
When you recognize you are losing control or getting too emotionally attached to your Forex trades, it is better to exit trading for the day and keep your account balance intact.
It is better to live to trade again another day.
Another way that Forex trading can become addictive is when your greed gets the better of common sense and your trading strategy.
You then do not stick to your exit strategy and try to squeeze every last pip out of a move in the market.
Holding positions too long can set you up to lose the profits that you had been making and just isn’t worth the risk.
Go for a reasonable set upon profit for the day, but don’t be greedy.
Getting Psyched Out!
This topic covers quite a few different subtopics, but they all deal with the same thing. You let the market and your trading get in your head and mess with your trading plan.
Do not second guess yourself and jump from trade to trade erratically. Pick a direction according to your trading strategy and stick with it.
If not, you can find your trading capital dwindle quickly.
Refusing to Be Wrong
Some trades will just not go your way. It happens. We want to be right and we get upset if we are not, but do not let that psyche you out.
Being wrong sometimes is just part of trading. As a Forex trader, you just have to accept that you are wrong sometimes and move on.
Get used to it because admitting you are wrong and cutting and minimising losses and moving on is a lot easier to take than insisting you are right and ending up with nothing left in your trading account.
These are not the only reasons that Forex traders fail and lose money, but they are certainly the main ones and the ones that are the most common.
Becoming a real student of the Forex market, doing your research, developing a solid trading plan, managing your capital as well as developing great trading attributes like patience will all ensure that you will have a long and successful trading career.
Learn from other people’s mistakes in this list of the 10 reasons Forex traders lose money and your chances for consistent success in trading will improve dramatically!