Trading Forex is not as easy as many people might think. According to statistics, 70% to 90% of all Forex traders lose money, which means that 7-9 out of 10 traders will lose.
The main question is why this happens, well let’s find out what are the top mistakes traders do that leads them to lose money.
Low Starting Capital
Most forex traders start their journey by looking for a quick way to make easy money. And it is true that in Forex you can make a fortune or lose everything within a day, it is totally doable as forex marketers encourage you to trade large lot sizes and to use high leverage, some up to 500:1 , in order to generate large returns on a small amount of initial capital.
There is no other market where you can turn 100$ to 10 or 20K in a day, not even crypto can do that in such a small amount of time, well Forex can.
But, you must have money to make money, and it is possible for you to generate outstanding returns on limited capital in the short term as mentioned in the example earlier.
However, with only a small amount of capital and too-high leverage, you will find yourself emotionally broken with each candle created in your screen, and emotions which are another major reason traders lose money will kick in, leading to the worst possible decisions.
Thankfully, there is a solution for this problem, and that not to trade with low capital based on your leverage. Market can always go against you before it goes your way, so you need to be certain you have enough capital to secure enough margin until the trade goes your way.
Poor Risk Management
Risk management is one of the most important, if not the most important reason traders lose funds in forex.
As mentioned earlier many traders join Forex to make quick and easy profits using high leverage. What they all ignore is the fact that their number-one job is not to make a profit but rather to protect the funds they have on their wallets.
If the starting capital is lost, the ability to make a profit trading forex is lost as well. So it is essential to preserve the capital at any cost.
I am pretty sure you are all wondering how to do that, well it is simple, don’t over leverage your account and if it happens that you take a risky trade make sure you always place stop -loss orders.
It will be extremely wise to calculate the max that you are willing to risk in a trade. That could be 5, 10 or 15% of your capital, and what I mean by that is that if you have 1000$ on your account and you want to trade an asset, place a stop loss at 50-100$ loss, that will be the 10% of your entire capital.
If that trade goes bad the max you will lose is a 100$, and you will live to see another trade, because there are no traders out there without a bad trade, it will happen and you need to accept it. A good follow up strategy is that if you make profits on your trade and you are certain that you can make more, is to move your stop loss higher, to even a profitable position.
The Issue with what I just described, is that a plethora of traders do not put a stop loss, they over leverage their account with a result to suffer losses that they are not prepared to accept.
So, when you set up your strategy include the max amount you are willing to lose on a trade and use lot sizes that are reasonable, compared to your account capital. Most of all, if a trade no longer makes sense, get out of it.
Expectations / Greed
Moving on to the third major reason people lose funds in forex, false expectations and Greed.
Some traders feel that they need to squeeze every last pip out of a move in the market. There is money to be made in the forex markets every day. Trying to grab every last pip before a currency pair turns can cause you to hold positions too long and set you up to lose the profitable trade that you are pursuing. When we talked about Poor Risk management we focused on a trade going wrong, and how much of your capital you are willing to lose in such a trade, well Greed and false expectations works the other way around.
Many of the trades you will make will go your way, which means they will be profitable, the biggest question here is when do you close the order and take profits, well you should use the same Risk assessment you did for your bad trades ,and that is to set a take profit.
When you enter a trade and you are willing to lose a 100$ in it you should at least have an amount that you are willing to win, that could be 100-200 or 500$ for example, so set a “take profit” and stick to it. Majority of traders will not do that, and they will try to win more and more , as a result the market will turn around, wipe their profits, emotions will kick in, and they will end closing the trade in loss, a trade that was profitable minutes ago.
So don’t be greedy and dont have extreme expectations. It’s fine to shoot for a reasonable profit, as there are plenty of pips to go around. Currencies continue to move every day, so there is no need to get greedy and go for every last pip.
Reason number 4, Emotions. As humans, we are vulnerable to emotions that accompany our trades, especially when we are on the losing side of a trade.
Becoming fearful, greedy or over-confident can lead you to exit a position too early for fear of losing money.
Once a position is open, you should allow either the take-profit or stop-loss level to be hit. Instead, most of the beginner traders tend to change their take-profit and stop-loss orders out of fear. If the market starts moving against the open position, then beginner traders generally shift their stop-loss orders and vice versa.
The key is to find a medium where you can follow your strategy, no matter what your emotions are urging you to do, use a business approach to it.
Additionally never trade when you are in an upset or euphoric state, as this will cloud your judgment and lead to mistakes. Lastly you need to accept that sometimes you are wrong, it happens.
Be sure that controlling your emotions will save you plenty of effort down the road making up losses from impulsive trades that otherwise should be avoided.
Overtrading is another major reason why Forex traders tend to lose money. The less experienced traders make one fatal mistake and that is chasing the price, out of excitement, out of eagerness to make profits, or because they want to trade.
Forex traders who have no strategy will jump in and out of the market and trade multiple pairs per day, which will result in fees and commissions, because don’t forget that every time you open a trading position you start with a handicap.
Imagine that with every lot your commission can be ranging from 5-7$, or the spread can be a couple of pips, those in a high number of trades add up, and they will eat up your capital really fast.
A Forex trader does not have to make a lot of trades to be successful, you just need to make the correct trades, and that can be 1-2 trades per day, and some days if the right set up does not appear or the circumstances are not right you don’t place any order. Being a trader does not mean you need to trade every day.
Bonus Tip: Adapt to the Market
To avoid losing money, you need to be certain you have set yourself ready for what is to come. It is very reasonable to say that all the 5 issues we mentioned can be somewhat solved.
You can have enough capital, manage your Risk, set logical expectations , control your emotions to a lvl, And stop overtrading, all are doable, But there is one more thing left fro you to do, in order to become better trader and avoid losing money, and that is to create a strategy or a plan for every trade you make.
Conduct a scenario analysis and plan the moves and countermoves for every potential market situation. To become successful in Forex trading you need to adapt to market changes and modify your strategies to conform to them. A Successful trader plans for low probability events and is not surprised when they occur. So always plan ahead.
The forex market is attractive to many traders because of the low account requirements, round-the-clock trading, and access to high amounts of leverage. If you approach it as a business, forex trading can be profitable, but reaching a success level is tough and most likely it will take a long time.
Be certain that avoiding the most common mistakes in forex trading we mentioned here will help you a lot!
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