How Come Forex Traders Lose Money?
Why do Forex traders lose when they first begin trading or after they've done it for a while is a common question we get. So, there are ten basic factors in total. Traders will categorise their losses into one or more of these categories before moving on and declaring that trading isn't for them, that it's too difficult, or that it's a fraud. The sad truth is that they never built their trading on the right principles from the beginning.
So let's jump right in to the main causes of traders' losses and how you may avoid making the same mistakes. Watch our reasoning below if you would rather watch videos:
Top 10 Causes of Trader Losses
To help you avoid making the same mistakes, I've identified the main causes below and will go into more depth about each one.
- Poor Risk Management
- Not accepting responsibility for mistakes
- Over trading
- Risking too much
- No trading strategy
- Unrealistic expectations
- Indecisive trading
- Never wrong
- Not Enough Money to Trade with
- Focusing only on technical analysis
Poor Risk Management
Most traders start off with no knowledge whatsoever. This covers guidelines for risk management. They can believe it is perfectly acceptable and logical to place trades by assuming all risk when it comes to taking on risk. Trading has the reputation of being extremely dangerous, but this is actually gambling.
Professional traders are those that comprehend risk, don't gamble away their money, and only take on risk up to the amount they originally planned (unless they're scaling in). The novice trader lacks even basic tools, such as establishing suitable stop losses and profit targets. So be sure to learn about effective risk management before you start investing.
People, not only traders, repeatedly shirk their duty when something goes wrong. What transpires? Someone or something else is made to take the blame. When traders first enter the markets when they lose trades, they search for one specific cause. But they will never be the ones to do it. What then might it be? Did the brokers cause me to lose money? Have market makers searched for my stop loss? My trade just failed due to the news.
All of these expressions are used to assign blame when trading, but in actuality, you need to develop the practise of just accepting responsibility for your trades and losses. It will be impossible to advance until you accomplish this, but after you do that, you can genuinely become a better trader.
One of the most frequent and expensive mistakes traders will make is overtrading. The majority of the time, whether a trade was profitable or not, it occurs right after a trader has just closed it. The trader will attempt to return to the markets because they are either emotionally happy or sad.
The costs associated with trading are an important factor to take into account. For the majority of traders that fall into this category, spreads and commissions are the key fees. The key justification is that if you often enter and leave trades, you must pay a fixed commission and spread for each trade. This is the reason why traders lose money.
Risking Too Much
When traders first start out, many believe they need to "risk big" in order to make large profits. When traders take on too much risk with each trade, they wind up blowing up their own trading account, which is where they make a big mistake. Even internet traders would claim to risk 100%, which is absurd.
Starting out, you should establish sound risk management guidelines depending on your trading money. Less capital at the outset means higher leverage, which is bad for you.
No Trading Strategy
The idea of a plan won't really make sense to new traders entering the marketplace. Well, when it comes to trading, everyone needs a plan. In essence, it should explain why trading is a good idea, and if you don't have one, you shouldn't trade at all. Being consistent with a set of guidelines and standards will help you generate trading ideas.
We provide a structured approach for all of our traders to use, based on economic fundamentals. Your ability to consistently implement a strategy will essentially determine how successful you are. One major error traders make is believing they can adopt a technical strategy, which entails following lines and indications, while entering the market. The tactic is futile if economics are not taken into account.
Many people who start trading do so with the expectation of making a quick buck off the markets. Setting themselves up for failure by having unreasonable expectations is one of the main reasons traders lose. The market will determine how much money you can make from trading, not you as a trader.
I despise it to no end when so-called traders determine how much money they can make. The phrases "Make £5,000 a month trading," "Quit your job," and "Work from anywhere" are all huge warning signs that the people trying to entice you are feeding you false aspirations and dreams that are lowering your expectations.
Just look at the performance of hedge funds and investment banks to see that the greatest traders in the world can earn upwards of 50% in a good year. If you have unrealistic expectations for yourself, you'll be forced to take excessive risks, make excessive trades, or commit even more errors in order to meet your goals, but in practise, you'll end up moving further and further away from your ambitions.
What do I mean when I say unsure trading. Well, this is just a trait where traders literally freeze in terror before entering a deal, so they wait endlessly until they feel the market is ready to enter, all the while watching at price changes. Purchasing something and immediately selling it because of price movement is another example of irrational trading.
The unpleasant truth is that this dread would not be dictating your emotions or trading behaviour if you had a thorough strategy and appropriate risk. Long term trading confidence comes from having a strategy that goes beyond attractive patterns and indicators.
The financial status of the general public is one of the elements that has startled me. Simple: You shouldn't trade if you're not working. The cause is a psychological loss of money that is considerably stronger when you don't have any income, which makes you more prone to errors. Trading is a means of enhancing current revenue, not of providing it.
Never being wrong
The first mindset you want to have as a trader, I can almost guarantee, is the belief that your trades are always correct. However, there is no such thing as a 100% guarantee in trading, and having this kind of vanity can ruin you. You end up taking on greater danger when you begin to believe you'll never be incorrect. When you take a big risk and lose, you become irritated and start to believe the other reasons why traders lose money.
Accepting that losing is a part of the game is what you need to accomplish. The objective is to keep losses from exceeding your winnings. Some of the top hedge fund managers and traders have success percentages of between 25 and 50 percent, which means they lose more than half of their bets but win large when they're right and lose little when they're wrong.
Not Enough Money
This is a pretty intriguing reason why traders lose, but it isn't often discussed. Similar to the earlier discussed arguments about not having a job and not trading without one, trading is meant to supplement current income. But many people believe they can enter the forex market and earn money.
One of the main issues is that social media creators generate misleading expectations of trading, essentially selling the unrealized desire. In truth, you need a sizable amount of startup money to trade properly. Trading with the barest minimum forces you to utilise excessive leverage, which makes traders lose money quickly. Having an income-producing job is the first step towards achieving financial stability; after that, you can focus on developing yourself.
Technical Analysis Only
Our last and possibly most significant reason why established traders fail is that they pay excessive attention to technical analysis. Trading professionals believe that they must comprehend the charts, price, and indicators. Technical analysis is actually only effective for a few things, such as spotting a specific trend or deciding when to enter trades. It's awful for attempting to predict the course of pricing in the future.
You must comprehend fundamentals for this one and only reason if you want to acquire the greatest possible price prediction based on economic facts in the future. There's a good probability you'll wind up like the majority of losers in trading if you don't use both sorts of analysis. By becoming aware of these factors and developing better trading practises, you can save time and money.
Not using Automation Technology
Additionally, I believe it's important to point out that traders typically reject automating the objective aspects of their trading research.
You won't have time to sit there and manually create patterns or model your projections in Excel, and the results will be mediocre at best.
If there is one thing I've learned over the years, it's that automating time-consuming analysis reduces errors, saves time, and results in greater trading returns.
And the terrible thing is that developing the technology necessary to automate some of a retail trader's techniques is quite challenging, so they end up doing nothing at all.