Updated: Feb 12
Why Do Forex Traders Lose?
Common questions we're asked is why do Forex Traders lose when they first start off trading or when they've tried it for some time. Well, it comes down to 10 main reasons. Traders will fall into either one or more of these categories on why they lose then go off on their way and say trading isn't for them, it's too hard it's a scam. The harsh reality is they never started off their trading with the correct foundations.
So lets go ahead and get straight into the core reasons why traders lose and how to prevent yourself from falling down the same path. If you prefer to watch videos go ahead and watch our reasons below:
Top 10 Reasons Why Traders Lose
Below I've listed the core reasons and I'll cover each reason in a little bit more detail so you can prevent yourself from making the same mistakes.
Poor Risk Management
Not accepting responsibility for mistakes
Risking too much
No trading strategy
Not Enough Money to Trade with
Focusing only on technical analysis
Bonus: Not Using Automation Technology
Poor Risk Management
Most traders get into trading without understanding a thing. This includes risk management principles. When it comes to taking on risk they may think it's completely fine and logical to be placing trades by risking everything. In reality this is gambling and it's why trading has this persona of being too risky.
The professional traders are ones who understand risk, they don't gamble their money away and they only risk what they set out and no more (unless they're scaling in). Even simple tools like setting appropriate stop losses and profit targets the noob trader lacks. So before you start trading make sure to learn about real risk management.
Time and time again people and not just traders fail to take responsibility when things go wrong. What happens? The blame gets put on someone or something else. When traders get into the markets and they lose trades they try to find one single reason why it happened. BUT, it will never be themselves. So, what could it be? Did the brokers do make me lose? Did the market makers hunt my stop loss? News just made my trade fail.
All these phrases are put to blame when trading but the reality is you need to get into a habit as a trader to take sole responsibility of losses and trades. Once you do this you can actually improve as a trader but until then it will be impossible to progress.
Over trading is one of the most common mistakes traders will make and a costly one for sure. It generally happens the most after a trader has just exited a trade whether it be a losing one or a winning one. The trader will either be emotionally happy or upset causing them to try get back into the markets.
One key fact you need to consider when trading are the costs involved. Spreads and commissions are the main ones for most traders that fall in this category. The main reason being if you keep entering and exiting tradings then you need to pay a fixed commission and spread per trade. This is what causes losing traders.
You just need to remember that you don't need to make lots of little winning trades. You just need to make a few correct trades that win big and keep losses small. It's a core reason why you need to systematically trade like our strategy at logikfx.
Risking Too Much
Traders come into trading thinking it's somewhere to earn big where they think they need to "risk big". That's where traders make a massive mistake, they risk too much per trade which causes them to actually end up blowing up their own trading account. Even traders online will say they risk 100% which is crazy.
What you need to do when starting out is setting proper risk management principles based on your trading capital. If you start with less capital then you start leverage more which messes you up.
No Trading Strategy
Beginner traders coming into the markets won't really understand the concept of a strategy. Well, everyone needs a strategy when they come into trading. It should basically tell you why you should be trading and if you don't have one then you shouldn't really be trading at all. Having a strategy allows you to stay consistent in a set of rules and principles to come up with trading ideas.
We give all our traders a systematic strategy to follow using fundamentals (economic data). Your success will basically be measured on how consistent you can execute a strategy. One big mistake is that traders come into the market thinking they can follow a technical strategy which is following lines and indicators but that's completely wrong. If you're not considering economics the strategy is useless.
Many people come into trading thinking it's a get rich quick thing a quick profit from the markets. One of the core reasons traders lose is because of this exact reason of setting themselves unrealistic expectations. As a trader you never get to decide how much you can make from trading, the market will decide that for you.
Something I absolutely hate is when so called traders decide how much they can make. "Make £5000 a month trading", "Quit your job" and "Work from anywhere" are all very big red flags that what they're trying to reel you in with are false dreams and hopes which are setting you unrealistic expectations.
The best traders in the world make upwards of 50% on a good year just take a look at the performance of hedge funds and investment banks. If you set yourself ridiculous expectations then it will force you to risk too much, trade too much or make even more mistakes just so you can reach the goals but in reality you'll get further and further away of what you want to achieve.
What do I mean by indecisive trading. Well this is simply a trait where traders literally freeze in fear before placing a trade so they wait and wait and wait until they think it's the right time to get in staring at price movements. Another case of indecisive trading is buying something and selling it straight away due to price action.
The harsh reality is if you had a thorough strategy and proper risk you wouldn't have this fear driving your emotions or trading activity. Having a strategy that isn't just pretty patterns and indicators will give you that confidence in your trading over the long run.
One of the factors which has surprised me is peoples financial situation. If you're not working you shouldn't trade, very simple. The reason being a psychological loss of money when you have no income is much stronger and therefore causing you to make too many mistakes. Trading is not an income it's to build existing income.
Never being wrong
When you become a trader the first thing I guarantee you want to be is thinking your trades are always right. However, when trading you can never be 100% certain and having this sort of ego will get you killed. When you start thinking you'll never be wrong you end up taking on more risk. When you take on that big risk and lose you start getting upset and fall for the other reasons why traders fail.
What you need to do is accept that losing is part of the game. Keeping losses smaller than your winners is key. Some of the best traders and hedge fund managers out there have success rates of about 25-50% meaning they lose more than half their trades but when they're right they win big and when they lose they lose small.
Not Enough Money
This one is really interesting reason for why traders lose and it's not really talked about. Similar to mentioned points earlier about not having a job you shouldn't be trading without one, trading is to increase existing income. However, people think they can jump into Forex and create an income. One of the biggest problems is that creators on social media create false expectations of trading basically selling the dream which doesn't exist. In reality to trade properly you need a decent start up capital. If you're trading with the bare minimum you're forced to over leverage which causes traders to lose quickly. Remember the goal to being financially stable is first having a job with income and from there you can work on growing yourself.
Technical Analysis Only
Our final and probably one of the most important reason why existing traders fail is because of their overrated attention to technical analysis. What traders think they need to do is understand the charts, price and indicators. In reality technical analysis is only useful for a couple things like identifying a specific trend or timing your trades. It's terrible for trying to forecast the future direction of prices.
This is the sole reason you need to understand fundamentals to get the best probable outcome of future price depending on economic data. If you're not using both types of analysis there's a high chance you'll end up like the rest of the losing traders. Save yourself time and money by learning these reasons and improving your trading habits.
Not using Automation Technology
I also think it's worth mentioning here, that traders, in most cases refuse to automate the non-subjective features of their trading analysis.
Sitting there, manually drawing patterns, and manually using excel to model your forecasts, will leave you with no time, and a bunch of lack-lustre results.
If there's one thing I've learned over the years, it's that automating tedious analysis eliminates a huge chunk of errors, saves time and yields to better trading returns as a result.
And the sad thing is, for the general retail trader, it's very difficult to build the technology that allows them to automate aspects of their strategies, and leaves them to not do it at all.
Luckily, companies like us, help traders with accessing that technology at affordable rates.
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