Forex: 11 Reasons Why Traders Lose Money
Forex market is not very difficult to trade, as it seems. Over time, currency prices can only increase or decrease. So statistically speaking, 50% of the investors entering the market should end up with profits.
However the fact is that majority of the Forex traders end up failing and make a loss.
How is that possible, why investors lose money in Forex?
The answer lies not in market statistics, but in the minds and hearts of the traders. Forex traders usually lose money because of their own thoughts and mistakes.
Successful Forex trading requires a well structured plan, which is possible only through clear understanding of basic market concepts and the ability to perform continuous analysis and actively tracking the market.
If you are interested in making money in Foreign exchange market, read the suggestions below which explains the reasons why investors make loss and how you can avoid losing money.
1) Too much trading
This is a very common problem amongst loss making Forex traders. Many times, people don’t have realistic objectives about the Forex, don’t have enough money to invest or they simply become addicted. You must be careful of all these factors, as they will lead you to the path of loss.
Let’s explore in detail the reasons that lead investors to losses.
2) Lack of capital
To make profit in Forex (or any other investment) in this world, you need to invest money. However, many times investors do not have enough capital to invest in currency market, so they resort to leverage.
Leverage is kind of a “loan” that brokers offer to traders so that brokers can open positions at a higher value. Such a tool creates possibilities of generating considerably higher profits. But at the same time, losses are equally significant too.
If you have good risk management capacity, go ahead; use leverage according to your strategy. But in any case, you have to make sure you have enough money in your account to trade. Good capital relieves your emotional burden and leads to better results.
If you want to stop losing money in Forex, you need enough capital.
But how much money is required? It all depends on your financial goals and trading strategy.
There are a few things to keep in mind. The minimum size you can trade Forex is usually 0.01 lots (also known as a microlot – 1,000 units of the base currency). And a good general rule of risk management says that you should not risk more than 1% of the total capital in a single position. If you are a beginner, a higher risk percentage can expose you to disastrous losses.
Ultimately, there is no amount of capital that works for all traders. So you must balance the leverage you plan to use with the volume of your orders.
3) Addiction to trading and no patience
Another problem faced by people venturing into Forex is addiction to trading.
Forex trading can be really fun. Watching your account grow in real time can fill you with adrenaline. And on the other hand loss in the market will make you feel stressed. Sometimes people become addicted to these emotions and tend to overdo trading.
To avoid this problem, you must first draw up a clear strategy when things do not go as planned. Entering Forex without a plan is practically the same as visiting a casino and playing slots.
There is one very important thing you should always remember: Forex is uncontrollable. Not even the most powerful institutions on the planet can control it, so you shouldn’t try doing it. All you have to do is take advantage of the opportunities that arise and refrain from following your emotions when the strategy fails to meet.
Never Rush. Forex or any other investment will offer you better opportunities later.
Patience is the key when it comes to investing in Foreign exchange market and success is impossible, if you do not have patience. It may seem ironic, but sometimes the best way to make a profit in the market is simply to refrain from trading.
4) Not adapting to market changes
Amongst the reasons Forex traders lose money is overconfidence in their trading strategy. Many people believe that if a strategy shows good results in the present, it will continue to do so in the future.
Remember that Forex is constantly evolving and if you want to succeed, you must have a good ability to adapt to changes. Don’t panic! Many believe that changes are negative, although in this case, they are synonymous with new opportunities that will probably exponentially increase your profits. A static market is the one in which prices never change. And if markets remain static, it would simply be impossible to trade! So fine tune your strategy according to the market changes.
5) Not paying attention to the market volatility
Market volatility refers to the frequency and intensity of price changes of currency pairs. And this can occur at any time ranging from a few hours to several years. And that it is one of the most important success factors in Forex. Trading strategies generally show better results under specific market conditions. So it is important that you pay close attention to the market volatility. Best solution is to set up Google alert or any site you follow. These days most of the trading related sites have alert mechanism.
6) Not understanding fundamentals
Regardless of the approach used for trading (technical or fundamental), you cannot deny that economic annoucements (news, law changes or geopolitical events, etc.) has a considerable effect on currency prices. An economic announcement can cause traders to change or close their positions within the market, which in turn causes currency pair quotes to rise or fall.
Let’s take example of the recent trade war between US & China. Chinese Yuan has been on the worst decline in May 2019 since July 2018. It fell to nearly 7 per dollar. Similar is the case with Mexican Peso, which fell to 19.74 per dollar.
Check out economic impact of trade war.
For this reason, you should never ignore fundamental information, even if your strategy is based solely on technical indicators and chart patterns.
The key fundamentals you should pay attention to are:
- Interest rates
- Industry/company growth and revenue
- Job growth
- Consumer confidence
Warren Buffet, world’s most trusted and successful investor has always given lot of emphasis on fundamental analysis. And here are the key tips he shares with share holders to make it big in stock market.
8) Markets trend
To apply the strategy at the right time, you need to know if the market is in trend or in range. Lack of this skill will result in a trader using the wrong approach and eventually you will end up losing money.
9) Poor Risk Management
Forex traders tend to lose money quickly due to their poor risk management policies.
All trading platforms have mechanisms to control risk, better known as take-profit and stop-loss orders. You need to fully understand and master these to have effective control over your market exposure.
However, you should not forget that, if you set stop loss too tight you may end up losing money that you could have easily earned. Likewise, if you set a take-profit at an unrealistic level, the market will take the opposite direction and you will end up with losses.
10) No proper plan and not following
Lack of a trading plan is amongst the most common reasons in any form of investment including Forex.
Forex is just like any other kind of business/investment/career. You can’t just achieve success without creating a well-structured plan and following it. If you decide to start a business, one of the crucial elements you can’t miss is a business plan. The same applies to currency trading.
The two key elements of any trading plan are:
- When to enter and exit from the market
- Money management skills
11) Not setting realistic goals
In Forex market, you will find two types of traders: people who have never traded financially and stock brokers who are experienced. It is no brainer to see that the second group is more successful. And the reason stock traders tend to be more successful with currencies is that they simply know “Why do Forex traders fail” and “Why do all traders fail”.
The most common scenario is that you decide on price but do not respect your own trading plan. Similarly, realistic goals prevent you from involving your emotions in trading because they relieve the stress of trying to achieve the unattainable.
In short, Forex traders lose money mainly because of psychological reasons. If you do not want to fall into this group of investors, you must thoroughly study the Forex market and prepare a solid trading plan that will keep you away from human error.