10 Reasons Forex Traders Lose Money

Reasons Forex Traders Lose Money

Research suggests that up to 80% of new Forex traders quit after the first few losses and unfortunately, most traders are unsuccessful. This article elaborates on the 10 Reasons Forex Traders Lose Money, and will highlight trading mistakes that are easy to avoid so that you have greater chances of succeeding as a trader.

Forex trading is a long-term commitment, whether you are a beginner or an expert, and you need to commit to taking all the necessary measures to manage your risks, educate yourself and improve your trading skills. 

Most traders give up before starting because they are demotivated by losing money, but a negative attitude could also be the reason you are losing money and changing your attitude is easier than changing your strategy!

 

Expecting the impossible

In most cases, making big trades will not guarantee big profits, and most successful Forex traders advise that making smaller trades more frequently increases your chances of success and minimizes your financial risks and market exposure.

As a Forex trader, you need to adopt a mindset of spending several days at a time on a single trading objective and avoid spending all your capital on one day.

 

Failure to use a trading strategy

All successful Forex traders agree that a trading strategy is essential and that decisions should be based on research and analysis. Trading on a hunch or out of impulse or habit may result in massive financial losses and disappointment.

When you apply a trading strategy, it means that you are making calculated trading decisions based on facts, analysis and research.

A trading strategy is important because not only is it used as a map for your trading journey, but it outlines your risk management plan and your trading methods. 

Using a strategy helps to keep you on track and protects your trading capital, which is a critical factor of trading responsibly. 

Whether you have developed your own strategy or you are using someone else’s, you need to ensure that you understand the logic and theory behind the strategy and how the strategy can be used to meet your trading objectives.

 

No trade management methods

A trade management plan covers all the essentials of every trade, including but not limited to when you should open and close trades, which risk and reward ratio level is acceptable, and the risk parameters you should use.

Managing your trades with logic and planning prevents you from reacting emotionally and making impulsive decisions that could damage your trading portfolio. 

A trading plan ensures that you make decisions objectively and protects your account balance.

 

Lack of capital to start trading

The amount of capital you need to start trading depends on your individual trading objectives, your budget and your level of experience. 

As a beginner, starting with a large amount of capital is not advisable because you may lack the necessary experience to maximise the potential of a bigger investment.

Alternatively, you can trade using leverage, which ultimately puts you in debt to the broker. This feature gives traders an opportunity to enter markets with up to 1000 times the amount they initially started with, depending on which broker is used.

However, it exposes you to greater risks because if you do not earn profits on your trades then you will not be able to repay the broker and you will lose your initial capital.

Research suggests that $1,000 is a reasonable amount for start-up capital. If you do not have the funding available, it might be a good idea to start saving money specifically for trading so that you don’t have to use leverage.

If you decide to trade with leverage, make sure that you adjust your trading strategy and management plan accordingly, and utilize tools such as Stop-losses and Take-profits so that you can manage your risks and control your trades efficiently. 

 

Spending too much too soon

It is important to understand that trading is not the same as gambling, and you cannot rely on luck to be a successful Forex trader.

A trading strategy will show you how much you need to invest for a specific goal, and you never need to exceed this amount because doing so might put you at risk. 

Always remember to remove emotions from your trading activities and only increase your trading amount when your account balance increases.

 

Trading too much 

Over-trading might not be the reason you are losing money, but trading too much will cost you a lot because of transaction and trading fees.

This is why it is important to enter the market with a strategy in mind.

The success factor of Forex trading is not to make a lot of big trades at any given moment, but to make fewer small trades at the right time.

You should only enter the market if doing so aligns with your trading strategy and if the market conditions are favourable for your specific objectives and trading plan. 

 

Inability to manage risks

The biggest reason why Forex traders lose money is because of a lack of risk management methods or tools. 

Your trading strategy should include a well-revised risk management plan because it will help you minimise your risks and stay within the parameters of your trading budget.

The most common tools for managing risks are Stop-losses and Take-profits, which prevent trades from exceeding a specified amount once a certain condition is met. 

These control mechanisms will protect you at all times and should be established before you begin trading. 

If you are not managing your risks, then you cannot manage your money!

 

Being in denial 

Regardless of what happens, you cannot blame the economy or other Forex traders for your losses. 

You need to conduct your own research and educate yourself so that you make informed trading decisions.

 

Indecisive trading 

Every trade you make should be based on a calculated decision and no trades should be made on impulse or because you think that you will be lucky. 

Despite the potential profits that can be made from a trading opportunity you did not expect or accommodate for in your trading strategy, the risk is too high, and making one move out of line will require your entire strategy to be readjusted for one single trade!

It will never be your last trade unless you have spent all your trading capital, so avoid trading out of fear or because you are feeling lucky or indecisive. 

The same goes for not trading at all because you cannot decide whether or not you want to trade. 

Your trading strategy is aligned to meet specific trading objectives and designed to accommodate certain market conditions so that it’s safe to take calculated risks.

 

Obsessive trading

Forex trading is an exciting activity, with many highs and lows. It is an emotional roller coaster with high risks and massive potential. 

The problem is that many traders become greedy and get trapped in the loop of trying to make profits every day.

It is important to balance your trading activities to avoid getting carried away, especially when you have made a few successful trades in a row. 

Forex trading cannot be compared to gambling in any sense and the same forces are not at play.

You are not investing money with the hopes of getting a quick profit, and it will never work like this. 

Trading obsessively every day will not increase your chances of making profits, but it will expose you to greater risks and emotional turmoil.

 

Chasing the thrill of trading

Forex trading is exciting because of the prospect of earning real money and people chase the thrill of trading every day in hopes of making profits. 

It is important to understand the psychology of Forex trading and how it can impact you on personal levels.

You should learn to recognise when you are getting emotionally involved with your daily trading activities, and when this happens it is best to exit the market for the day and return when you have regained clarity and focus.

Never trade without your strategy and always stick to the rules you set for yourself.

As with any other addiction, it can easily get out of control and the results are hardly ever positive, so be mindful and trade responsibly!

 

Conclusion

There is an actual science, mathematical behind Forex trading, so adopting the mindset that you need to make calculated decisions based on facts, research and analysis, as a scientist would, will greatly increase your chances of success and always remember the 10 Reasons Forex Traders Lose Money before you make your next move.

Implementing a Forex trading strategy will significantly increase your chances of success, and you can view our Trading Strategies Guide here.