Why do Forex Traders Lose Money

[tathanhthientu]

It’s commonly known that most forex traders fail. In fact, it’s estimated that 96 percent of forex traders lose money and end up quitting. To help you to be in that elusive 4 percent of winning traders, I have compiled a list of the most common reasons why forex traders lose money.

1. Low start up capital
Most forex traders start out looking for a way to get out of debt, or to make easy money. It is common for forex marketing to encourage you to trade large lot sizes and trade highly leveraged to generate large returns on a small amount of initial capital. You must have some money to make some money. It’s possible for you to generate outstanding returns on limited capital in the short term. However, with only a small amount of capital and outsized risk, you will find yourself being emotional with each swing of the market and jumping in and out and the worst times possible.

Solution:
People that are beginners in forex trading should never trade with only a small amount of capital. This is a difficult problem to get around for someone that wants to start trading on a shoe string. $1000 is a reasonable amount to start off with, if you trade very small. Microlots or smaller. Otherwise you are just setting yourself up for potential disaster.

2. Failure to manage risk
Risk management is key to survival. You can be a very skilled trader and still be wiped out by poor risk management. Your number one job is not to make a profit, but rather to protect what you have. As your capital gets depleted, your ability to make a profit is lost.

Solution:
Use stops, and move them once you have a reasonable profit. 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.

3. Greed
Some traders feel that they need to squeeze every last pip out of a move. There is money to be made in the forex markets every day. Trying to grab every last pip before a currency pair turns can set you up to lose the profitable trade that you are sitting on.

Solution:
It seems obvious but, don’t be greedy. It’s ok to shoot for a reasonable profit, but are plenty of pips to go around. Currencies move every day, there is no need to get that last pip. The next opportunity is just around the corner.

4. Indecisive Trading
Sometimes you might find yourself suffering from trading remorse. This happens when a trade that you open isn’t immediately profitable, and you start saying to yourself that you picked the wrong direction, and then you close your trade and reverse it, only to see the market go back in the initial direction that you chose.

Solution:
Pick a direction and stick with it. All that switching back and forth will just make you lose little bits of your account at a time.

5. Trying to pick tops or bottoms
Many new traders try to pick turning points in currency pairs. They will place a trade on a pair, and as it keeps going in the wrong direction, they continue to add to their position being sure that it is about to turn around this time. If you trade this way, in the end you end up with much more exposure than you planned, and a terribly negative trade.

Solution:
Trade with the trend. It’s not worth the bragging rights to pick one bottom out of 10 attempts. If you think the trend is going to change and you want to take a trade in the new possible direction, wait for a confirmed trend change.

6. Refusing to be wrong
Some trades just don’t work out. It’s human nature to want to be right, but sometimes we just aren’t. As a trader, sometimes you have to just be wrong and move on, instead of clinging to the idea of being right and ending up with a blown account.

Solution:
It’s a difficult thing to do, but sometimes you just have to admit that you made a mistake. Either you entered the trade for the wrong reasons, or it just didn’t work out the way you planned it. Either way, the best thing to do is just admit the mistake, dump the trade, and move on to the next opportunity.

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[jmathers]

Bottom line, experience & knowledge is key. If you're a new guy trying to sharpen your skills as a forex trader make sure to have a good set of mentors that you can learn from.

[alexander james]

Traders lose money because some trade without enough forex knowledge. A trader should bank on knowledge and learn from other trader's experience to be more successful in trading.

[gnike]

Thanks for the info.

Originally Posted by jmathers

Bottom line, experience & knowledge is key. If you're a new guy trying to sharpen your skills as a forex trader make sure to have a good set of mentors that you can learn from.

I agree. I'm actually an amateur to this industry but here I am, learning first before truly embarking on the business. I do not have a mentor as of yet, but I am looking for one.

[JFogel]

Mostly due to human nature, partially due to experience, partially due to not enough research, and partially to do with the fact that no strategy is 100%.

Human nature is hard to get over; not moving your stops/limits, taking MUCH larger losses than you do gains just because you were hoping the market would turn around, picking high/lows, etc. This is more of the "emotion" side of trading people always talk about.

[frankpure]

what you said are all true, but it is hard to be carried out by newbie trader.everyone knows why they are lose money in trading forex but few of them can correct their mistakes, why? because they just know the reason but there are no clear rules to tell them how to avoid making mistake next time.
now my experience is that,
1/only use one indicator to trade and keep using it.always remember this.
2/trade as less as you can if you are not a "second/minute" trader.

if you can carry out these two rules, your loss will be sharply reduced. you can try this for two month to see the great effect.

[AFB]

great topic , thanks for sharing

in my opinion it's because of Greed

[JFogel]

There are too many sides of human nature that gets in the way of trading. Thank goodness for stops/limits so we can just set it up and walk away. I have a bad habit of taking huge losses and small profits if I don't setup stops and limits.

[founders.forex]

One of the main reasons why a forex trader loses lot of money is nervousness and pressure which can lead to emotional mistakes and this prove to be very costly for the traders. Due to these emotional mistakes large part i.e. 95% of the traders fail in Forex market. This is the place where you need to control these emotions and be able to trade according to your brain and not your guts. This is why so many traders lose money on Forex.

[JFogel]

I think over-trading is also a large issue. I know one trader that's always in 4 different currency pairs at once. In the end, he doesn't know how the currency pairs correlate to each other and breaks completely even. Time. After. Time.

Most failed traders were people that felt it was necessary to always be in a trade, rather than looking for correct setups before entering. Oh yeah, and back-testing the setups to make sure it is worth the risk.