5 Psychological Factors that Keep You From Succeeding in Forex

There are many factors that contribute to your success in the market. Successful traders usually are the people that have accumulated a lot of experience, as well as knowledge of the market basics, and have utilized them in their favor.
 
But besides knowledge and experience, trading psychology can also have a huge impact on your trades. Improper mental attitude towards financial exchange can easily lead a trader to failures in Forex. In fact, many successful traders point out that beginners should always start with building a proper mindset first and then move on to more technical aspects of trading.
 
In short, a trader’s worst enemy is their own selves. In this article, we will talk about five psychological factors that contribute to the failure on the Forex market:
 

  • Having too high expectations
  • Not setting up a plan beforehand
  • Overtrading
  • Not being flexible to market changes
  • Not/improperly using risk management techniques

 
Whether it’s the desire to quickly make a fortune from Forex, avoiding structure in trades, placing too many or too high positions, expecting your single strategy to always be successful, or not using take-profit/stop-loss tools properly, these factors can easily turn into the reasons why traders are losing money trading Forex.

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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.
Forex traders lose money

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.”
 Prevent loss trading Forex
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.

Reasons why Forex traders lose money

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.

 Why do Forex traders lose
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.

 

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Why do Forex traders lose money? - Key takeaways

Traders of Forex can lose money for lots of reasons. These reasons can be purely technical like the rapid market changes, insufficient knowledge or experience, etc. While these factors are undoubtedly very “effective” in making trades fail, psychological reasons for failure tend to stand out even more.
 
In the above guide, we talked about five psychological reasons why Forex traders lose money:
 
  • Having too high expectations - thinking that it is possible to make a small fortune very quickly
 
  • Not setting up a plan beforehand - the lack of structure in trades that leads to poor trading decisions and losses
 
  • Overtrading - placing too many and/or too big trades without stopping
 
  • Not being flexible to market changes - believing that one universal strategy can be effective in any market condition
 
  • Not/improperly using risk management techniques - not ensuring that the maximum losses/minimum payouts are within the range of your control
 
These factors are far from being the only ones that contribute to the failure on the Forex market, however, tackling them individually can greatly increase the effectiveness of a trader and the possibility of payouts in a trade.
 

FAQ on why do Forex traders lose money?

1.Can you lose money trading Forex?

Of course, you can. In fact, if you look up how many Forex traders lose money, many sources will vary from 70-90% of traders. This, as you can see, is a very high number and an indicator that there is nothing guaranteed in financial markets.
 
There are lots of reasons why a Forex trader could fail: the lack of knowledge and experience on the market, trading during a financial crisis that produces very drastic market movements, etc. Of these factors, psychological ones are said to be the most crucial.
 
We talked about five psychological issues that lead to a loss in Forex:
 
  • Expecting to become super-rich in a short time
  • Not having a certain structure to follow while trading
  • Excessively trading an asset
  • Not adapting to new market conditions
  • Not employing proper risk management techniques
 
These factors individually, as well as collectively, can prove detrimental to the effectiveness of the trade and lead people towards a failure.


2.How can a trader avoid loss trading Forex?

Because a trader is their own biggest enemy, the biggest contributor to a loss in the Forex market is a flawed mental attitude towards trading. What this also means is that through self-correction techniques, traders can reduce the risks of the failure.
 
In the above guide, we looked at five ways traders are setting a course towards a losing position and how they can avoid that:
 
  • By lowering the expectations and not hoping to make a fortune out of a trade or two, a trader can remain grounded at all times and be more rational in the process. And as experienced traders point out, being clear-headed is the most effective way to remain successful in the market
  • By creating a trading plan, a trader can reduce the number of new occurrences that can overwhelm them and impair their rational thinking. Besides, a trading plan can provide a certain limitation to a trader, making them realize that they have already thought about how to remain effective in long-term
  • By limiting their inclinations towards overtrading and realizing that it’s not about trading everything all-day-long but about remaining consistently profitable in a limited number of trades is what makes traders successful
By employing various risk management strategies like stop-loss/take-profit or the risk/reward ratio, traders can limit the possible losses and determine the amount of payout that they are comfortable with

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