Why do most Forex traders lose money?
When people enter the foreign exchange market, their goal is to be successful and get payouts, obviously. And in many cases, they manage to be successful by having a certain structure they can follow and having the market acting in their favor. However, an average Forex trader, unfortunately, is set to failure because trading is a zero-sum game where if one group of traders win, another group loses.
Now, there are many technical reasons why a Forex trader can be set to failure: lack of knowledge of Forex basics, little to no experience in trading, unfavorable market conditions, etc. These conditions are oftentimes the main causes of loss in Forex.
However, a mental attitude towards trading is no less critical (if not more) factor for traders who have lost money trading Forex. As one piece of common knowledge suggests, a trader is their own biggest enemy because the psychology they employ during trading is flawed right in its core.
Psychological reasons for failure in Forex
One of the biggest misconceptions people have about trading on any financial market is that it is somewhat different from any other regular business. This belief automatically suggests that there is no need for initial planning and that it’s about grasping the momentary chance that the market offers.
This ill-advised psychological attitude towards trading is what causes traders to lose money on Forex. In this article, we will discuss five specific issues that are related to trading psychology and ultimately lead to failure:
- Having too high expectations - the belief that trading Forex can make someone super-rich in a short amount of time
- Not setting up a plan beforehand - the absence of structure that leads to anxiety and ineffective decisions during trading
- Overtrading - excessively buying and selling assets without stopping
- Not being flexible to market changes - having only one trading strategy that isn’t fit for different market conditions
- Not/improperly using risk management techniques - not properly setting stop-loss/take-profit limits and not assessing trades using the risk/reward ratio
So, the reason why most Forex traders lose money is that they don’t think about all the above-mentioned factors before they enter the foreign exchange market. Let’s review these issues individually and see how they contribute to the failure on the market.
Forex trading losers have too high expectations
When entering the foreign exchange market, or any other market for that matter, it is essential to realize that trading is not a financial activity that can bring a big fortune in a short period of time. Of course, there may be exceptions but those who have been lucky are just exceptions and nothing more. Being patient and consistent proves to be a more effective way to remain successful in the market.
Unfortunately, many beginner traders get into trading with high expectations: they’ve heard stories about super-rich Forex traders and want to follow that same route. What they don’t realize is that the majority of success stories are a product of slow and consistent work on the market, instead of a sudden “miracle.”
And when that “miracle” doesn’t happen, traders with high expectations tend to fail. They open too large positions without assessing the market, which poses too great a risk to their account and which ultimately becomes the reason why many people in Forex trading lose money.
So, instead of chasing the price and trying to earn big payouts with individual trades, a step-by-step trading strategy with modest incomes can usually be a better way to remain successful on the market. This way, small payouts will eventually turn into a large capital that is so flashy in every Forex success story.
Trading without a plan is a road to failure
As noted above, Forex trading is no different from having a business. And just like a business, it requires initial planning and strategizing. Unfortunately, though, many inexperienced traders tend to overlook this important step and jump to trading right away.
This affects their trades in two ways: first, they don’t have a specific set of directions that they are going to follow. Without determining a specific instrument that you’re going to trade, a specific time of the day when you are planning to enter the market, a budget, goals for payouts and losses, etc. your trades are going to be all over the place.
Secondly, the absence of structure can easily make even an experienced trader anxious of new market developments. There’s nothing new about the fact that unexpected occurrences overwhelm and confuse people. Without a course of action, these occurrences can lead to ineffective trading decisions and ultimately, make Forex traders lose money.
Therefore, in order to be more prepared for any occurrence in the market and be less susceptible to failure, it can be a good idea to set up a trading plan before entering the market. Not only will the plan introduce structure to ensuing trades but it will also give traders a peace of mind, knowing that there is a set of directions that they can follow.
Limit overtrading to prevent loss trading Forex
Another very serious issue that leads to losses in Forex is overtrading. It is associated with not being able to stop placing new and/or big trades in the market. The issue of excessive buying and selling of trading assets can be caused by two fundamental human emotions: greed and anger.
In trading, greed arises when a trader has had a successful trading session, gained a significant amount of payouts, and places new and even bigger trades to get as much money as possible. However, this strategy can be a good way to keep losing money trading Forex because, after a long trending period, the market tends to retract quite significantly, turning the previously successful strategy into losing one.
As for anger, it occurs when a trader has experienced a serious loss. Usually, any trader would want to offset their losses with new trades and upcoming payouts, however, some traders are blinded by their anger and excessively open new trades without any specific goal, which is also a direct route towards failure.
So, making sure that you are trading just enough per day to maintain effectiveness can be a good way to avoid failure in Forex. Because, again, trading is about being consistent and not about getting a fortune in a day or two.
Flexibility is an advantage
One of the key characteristics of any financial market, whether it’s Forex, commodities, etc. is that it is never static: prices are always changing, sometimes rapidly and sometimes less intensively. The dynamic nature of the market is the reason why people remain profitable in Forex, as well as other markets.
However, regardless of the market being so dynamic, some traders believe that one universal strategy is always going to work and will always bring them new payouts. They think that a strategy for, say, volatile markets is going to work for trendy markets as well and the other way around, which is a mistake and another answer to “why do many Forex traders lose money?”
Every market condition has its own specific strategy; the sooner a trader realizes that, the higher their chances of success will be. This is exactly what being flexible in the market means: quickly interchanging volatile-based strategies with trend-based strategies and the other way around.
Limiting losses with risk management
Last, but certainly not least, risk management. Any trading platform, whether it’s MetaTrader 4/5, cTrader, or anything else, is equipped with various tools that help traders limit losses within their trades. And among those tools, stop-loss and take-profit limits are the most popular.
The stop-loss and take-profit allow traders to set a maximum limit to possible losses, as well as a minimum limit to the payouts. But it’s not enough to merely use these tools in trades; one reason why Forex traders fail is that they don’t set stop-loss and take-profit limits more accurately.
If the stop-loss is too low, losses can turn out really devastating to the trader’s trading account; on the flip side, if the take-profit is too high, the market may not reach the desired volatility to generate enough payouts and go over that limit, leaving the trade open for enough time to turn into a losing position.
There are, obviously, other risk management strategies in Forex like the risk/reward ratio. With this method, traders can assess the possible effectiveness, as well as the ineffectiveness, of a trade. By knowing the possible payout and loss sizes, a trader can then determine whether the given trade is worth taking or not.