Forex Trading

Why Forex traders lose their money

 

There is no accurate information on the percentage of number of losing traders in the Forex market. However, the majority of unedited online sources indicate that more than 90% of currency traders are joining the losers camp sooner or later. Despite this, the promotional phrases that try to entice many to join this market remain widespread, claiming that “trading is not complicated.” But if the profit in this market is so easy, why do so many traders fail? Let’s analyze in the next lines the reasons behind the poor performance of most Forex traders.

 

Not using a proven strategy

All Forex traders know how important it is to use a strategy that has been thoroughly tested and tried. Nevertheless, few of them have the patience to test their strategy long enough. Currency pairs are taking bullish or bearish trends for weeks, which provides an opportunity to make good profits by using one of the trend tracking strategies. However, when the market enters a consolidation phase, this strategy begins to fail and may ultimately lead to huge losses for the trader. That is why it is essential that the strategy is tested during both turbulent and calm markets. The previous performance test (back test) is not the final step in trying the strategy, it is nothing more than a step to determine whether it is feasible to use it in the market or not. This stage should be followed by improving the strategy settings and using them on real prices (whether via paper trading or demo account). Forex and skin traders lacking these steps are more and quicker to join the losers camp.

 

Low risk-reward ratio

There are always trading opportunities available in the foreign exchange market. At least you will find two or more major currencies that take clear directions on which to trade. However, you do not have to open all open positions unless you meet the appropriate risk-to-return ratio criteria. For example, if the currency pair is trading below one of the resistance levels, it might be better to wait and enter after breaking this resistance. Opening a trade before the actual breakout can result in losses in most cases, for example due to a strong support level below the entry point. Applying the risk measure to the return in this case would have avoided you entering into a losing deal, and for this all traders who neglect the importance of risk assessment in comparison to the expected return will also end up in the losers camp.

 

Not using stop loss orders

All traders, professional and novice alike, know how important Stop Loss orders are. However, the application of this important instrument in practice while trading in the market is somewhat difficult from a purely psychological point of view. It’s common to see some traders complain of hitting stops levels due to sudden price jumps. This is where smart capital management comes in. Only practice will enable the trader to set appropriate levels to stop the loss. However, the importance of this important tool should not be overlooked. In other words, a Forex trader who ignores placing stop loss orders will find his or her account balance sooner or later at zero.

 

Misuse of leverage

Forex brokers mainly provide leverage with the aim of increasing trading volumes. However, the trader should use this dangerous tool with the utmost caution and wisdom. For example, trading a full lot on the EUR / USD pair with capital of $ 500 would be a risky adventure, because a 50 pip move would hit the stop loss level. However, when using the same leverage, i.e. 1: 200, to open multiple trades of 1 lot each while the account balance is $ 10,000, this will allow the trader to work in a safe environment. Thus it can be said that currency traders need to scrutinize the selection of deal sizes and avoid falling into the trap of abuse of leverage. Failure to adhere to these tips means once again sitting among the losers.

 

Greed

The trader should close his open position once he realizes that the prevailing trend is no longer in his favor. But in practice, this decision requires a kind of iron will so that the trader does not hesitate one second to close the deal. Greed gives a trader a false feeling that he can wait indefinitely until things turn out in his favor. But what often happens is that the trend continues in the opposite direction and the trader only makes more losses.

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