It is widely publicized how retail forex traders lose money.
In fact, many forex brokers who advertise these days are required by law to have this disclaimer.
Still, it does not deter people, and many continue to sign up and open a trading account.
It only takes a few weeks to a few months before such a trader eventually gives up on their dream of being a day trader.
There are many reasons why a day trader can lose money in the forex markets.
In this article, we will cover 10 reasons why traders lose money and speak in detail about these reasons.
You will also learn how you can avoid these mistakes.
Improper use of leverage in forex trading
Leverage in trading is one of the keys and core aspects of your trading journey.
When you open a trading account, you are prompted to choose leverage. Generally, traders have a choice to choose their leverage up to 1:200 (with a regulated forex broker).
But many blindly choose the highest leverage available.
There are a lot of things to consider when choosing leverage. More importantly, you should understand what leverage can mean for your invested capital.
Learn how leverage works in forex, if you are still unsure of the impact this can have on your trading abilities.
Being overleveraged or underleveraged is bad. Therefore, traders need to find a balance; a sweet spot that is the most optimal.
Once the leverage is set, traders ignore or even forget this aspect as they start trading. But traders should pay attention to factors such as margin levels, free and available margin.
This will give you an indication of whether you are taking on too much risk.
Not paying attention to your risk during forex trading
Risk management is a broad term that can mean many things.
From managing the risk, you take per trade, to using the correct contract sizes to trade, everything matters.
Traders need to develop a habit to inculcate this every time they put on a new trade. Even if one is using an automated trading system, risk management should be built into it.
Trading factors such as leverage, margin all play a role in how you manage your risk.
It is a well-known quote about how good traders manage risk and bad traders chase profits.
And this couldn’t be further from the truth.
The mindset automatically changes depending on whether you are managing your risk or simply eyeing big profits.
For a beginner forex trader, it can be tempting to chase profits. But it is only through experience does one get to learn the importance of risk management. Download Forex Beginner's Guide.
Paying attention to your trading lot sizes, your take profit and stop loss levels can give you valuable insights.
Using this information, traders can then assess whether they are getting over-aggressive in their trading or not.
While higher risk tends to give higher returns, this is not always the case.
Failing to adapt with the market
If there is one thing right, then it is the markets.
One of the best ways to understand this concept is to read this very famous shareholder letter from Warren Buffett. The 1987 Berkshire Hathaway statement is famous for a number of reasons.
It gives insights into how one of the best investors of our time and age plays the market.
While the markets may be different, day traders and speculators alike can learn a lot from reading this letter.
The markets are always right, and it is up to the traders to adjust to this concept.
You can use all the tools in the world, but the market will do what it does. It has a mind of its own.
Many forex traders get married to their ideas. And when the market proves them wrong, they continue to hold on to their ideas.
This is one of the biggest reasons for forex traders failing. One needs to be adept and flexible and thus follow the markets.
There may be pockets of areas where you can be right. But if you are wrong, that is when it takes a mindset shift to adapt accordingly.
New traders fail to recognize this aspect. And as a result, end up holding on to losing trades, risking all their trading capital.
The trial and error
At the same time, you cannot expect to make money trading forex by trading for a month and a few!
Just as learning any skill requires practice, forex trading also takes a lot of time and dedication.
But unfortunately, traders want to step up the learning curve as quickly as possible. This is when mistakes can be made.
Jumping early on into the trading game with your real money can be very hazardous.
Spending time on a demo trading account can really help you as a forex trader. As a beginner, you can start by picking one of the best forex currency pairs to trade.
Then simply use the demo trading account as if you were trading with real money. Try a Free Demo now!
However, bear in mind that no matter how much you practice on a demo trading, you will still see losses in your real trading account.
However, instead of getting upset, you are able to see things in a new light. This is where trial and error come into play. Your past experience with trading will allow you to see things differently.
Now imagine jumping straight to a real trading account, without the practice.
You end up risking your hard-earned money without any practice or familiarity to back up your trading ideas.
Not having your own forex trading strategy
Look around and you will find new and fancy trading systems, automated trading solutions and whatnot!
Have you heard the phrase, selling shovels to gold miners?
It is easier to make more money selling a trading system or a strategy or indicator rather than trading itself.
Due to the factor of greed, traders want to get rich quick. This is where one falls into the trap of buying a trading strategy that might make them money.
We have all been there!
But the sooner you realize this the better.
A simple illustration here helps. If you were to drive a car, there is a very good chance that you will adjust the seat, the rearview mirrors and so on. There is no one set that will fit all.
A trading system is the same.
You cannot expect to get rich buying a black box strategy off the shelf. A trading strategy is unique and personal. In fact, it reflects your trading style and your unique characteristics.
Replacing this with a standard system will sooner or later get you in trouble.
Not only have you lost your trading capital but also the amount you spent in purchasing such a system.
The best way to avoid this is to have a trading strategy that you can call your own. Forex trading strategies you should know.
Setting unrealistic expectations
A 20% return per year sounds fantastic, doesn’t it?
But do you really think this is realistic?
When it comes to trading, traders have a choice to either be active and trade on their own, or to invest in a trading signals service.
There are many forms of trading signals that include copy trading, social trading and so on.
In doing so, traders tend to look for the big numbers.
Systems that show a 50% or any such big number instantly attracts a lot of eyeballs. But the question of whether such growth is sustainable remains to be seen.
You can beat the market some of the time, but you cannot beat the market all the time!
Having realistic achievable goals will help you grow as a trader. Sure, the path may take a bit longer, but you will realize that a 5% return is easier to achieve than a 50% return.
This will automatically slow you down in your trading and help you to pay attention to risk.
When traders set high goals, in order to achieve them, they tend to feel pressured. This is where overtrading can kick in.
And this in turn can lead to traders making wrong trading decisions.
Focusing on too many instruments
Open your MT4 trading terminal and look at the instruments you have traded. Now ask yourself the question of why you picked those instruments. Get free daily insights from trading central.
How would you answer this question?
Traders tend to focus on too many instruments at a very early stage. They hope that this method will help them to make money quicker.
It is not surprising to see indicators such as correlations and so on making rounds.
The problem with trading too many instruments is that at some point it can be difficult to follow those trades. Risk management can take a hit you soon become over-leveraged.
All it takes is one wrong move in the market and your profits and your capital can easily be wiped out.
It is boring to say that traders should focus on just one instrument. While this is boring, the truth is that it has multiple benefits.
Focusing on one instrument helps you to:
- Get familiar with the currency pair you are trading
- Understand its characteristics (which forex session makes it more active, etc.)
- The daily average price movement
- And many more
The more familiar you are with an instrument, the higher the chances that you can keep your emotions at bay.
This also helps you to automatically focus on risk management and help you remain objective.
Not having a plan
Just as any military general would come up with a strategy first and then execute it, so should you!
A trading plan should tell you whether you want to go long or short, the reason behind this.
It should also tell you where to book profits and when to take a loss and exit. The take profit levels you set need to be realistic, and the stop loss level as well.
When your bias is wrong, your stop-loss is hit, and you know that the markets are proving you wrong.
A trading plan helps you to calm your nerves! When money is at stake, no matter how strong a will you have, you will still feel the pain.
Therefore, a trading plan will help you to understand and cut out the emotions.
It takes quite a bit of work to build up a trading plan. And many beginners in forex ignore this because they think it is too much work.
Without a trading plan, you will not get too far in your trading journey.
And of course, it is not just all about having a trading plan. You also need to revisit your plan and do a post-trade analysis. This will help you build familiarity with the instrument you are trading.
At the same time, this can also help you to understand if there are any weaknesses in your trading system.
The perils of overtrading
Overtrading typically happens when a trader is too addicted to trading, or fears that they may miss out on a trading opportunity.
Both these factors are in fact not the right justifications for overtrading.
One may overtrade especially if they hit a string of losing trades. The idea to take on one more trade to recover losses is a bad idea to follow.
Do you find yourself trading all five days of the week? Do you see yourself taking on multiple trades during the day?
Do you find yourself trading even when there is a major market holiday, and the currency pairs barely move?
Well, you have a problem and unfortunately, there is no Traders Anonymous to help you overcome this addition.
The only way to go easy on your trading is to disconnect, or even uninstall your trading terminal.
But this can be difficult since these days, you have mobile trading apps that keep you connected 24/7.
While overtrading itself is not a bad concept, the reasons behind this are important. If you are trading for reasons mentioned earlier, then you need to take time to figure it out.
Overtrading can lead you to take on undue risk, pay more commissions via fees and spread to your broker. And worst of all, it raises the risk of losing your profits.
Patience and persistence
Last but not the least, patience and persistence are two characteristic traits of successful traders. Learn psychology for forex traders.
Unfortunately, beginners to forex trading do not give this much thought.
Choosing the fast route over the longer but difficult route will not get you too far in your trading journey.
Just as it would take a few years of studying and then practice becoming an experienced doctor, so it does, with forex trading too.
But given the tools, false marketing hype behind trading systems, it clouds one’s judgement.
To be a successful trader, you need to have a number of years of experience, trading with real money. During this time, you will lose your trading capital. But if one gives up, then all is lost.
Being persistent and learning from your mistakes is how one can get better at the game. There are no guarantees! Traders with fifteen years of experience also end up losing money.
However, the biggest loss is when you give up, instead of staying persistent and learning from the mistakes.