There is no precise information about the percentage of Forex traders who lose money in the market. A large portion of unverified Internet sources indicate that more than 90% of Forex traders end up on the losing side. However, it is not uncommon to hear statements such as trading is not rocket science.
So, if it is easy to win in the market, why do so many traders fail? Let us analyse the reason behind the poor performance of most Forex traders.
Lack of a proven strategy
Every Forex trader knows the importance of a well-tested strategy. However, only a few of them have the patience to test a strategy over a considerable period of time. A currency pair can be in an uptrend or a downtrend for several weeks.
Therefore, a simple trend-following strategy will really generate great returns. However, when the same currency pair starts consolidating within a range, the strategy can generate false signals, leading to a huge loss. That is why a strategy should be tested both during periods of volatility and during periods of calm in a currency pair.
Strategy testing with historical data is not the final step in testing a strategy, but the process of identifying whether a strategy has the potential to be used in the market or not. It should be followed by optimization and testing of results (paper trading or simulation). Forex traders who do not have enough patience to follow these steps usually end up losing money.
Ignoring the Importance of a Proper Risk-Reward Ratio
There will always be some trading opportunity in the Forex market. At least one or two of the major currencies will be trending. Still, one should not execute a trade without considering the risk-reward ratio.
If a currency pair is trading below a major resistance level, then it would be prudent to enter after that resistance is broken. Opening a position in anticipation of a breakout could lead to losses most of the time as the major support level will be far below the entry level.
In such a scenario, the risk-reward ratio will not suggest taking such a trade. Traders who do not give importance to the correct risk-reward ratio have a higher chance of ending up in losses.
Avoiding the Use of Stop-Loss Orders
Both professional and beginner traders know the importance of Stop-Loss. However, applying Stop-Loss effectively while trading in the market is a difficult thing to do from a psychological point of view.
It is not uncommon to see traders complaining that their Stop-Loss order is often triggered by a downward movement. This is how the smart money works in the market. Only practice can help a trader identify a suitable Stop-Loss level. However, it should never be avoided. A Forex trader who avoids Stop-Loss will probably end up with his account at zero.
Misusing Leverage
Forex brokers offer leverage mainly to increase their trading volumes. However, it should be used wisely. Trading a full lot of EUR/USD with a capital of $500 is very risky because a 50 pip move against the position will trigger the stop-out level.
However, using the same 1:200 leverage to open multiple 1-lot positions with an account size of $10,000 is safer. Therefore, we can say that forex traders should choose the right size for their positions without using high leverage. Otherwise, they will end up in a loss.
Letting Greed Take Control
The trader must close a position as soon as he realizes that the trend is not moving in his favour. However, closing a losing position without a second thought requires some determination. Greed gives false hope to the trader, making him wait endlessly.
Since the trend is against the trader, losses will keep piling up constantly. Before the trader recovers, there would be a margin call and subsequent liquidation of positions. Likewise, a greedy trader will find it difficult to close a position with a profit at the right time. Even after the currency pair hits a major resistance level, the greedy trader will hesitate to take profits.
In the end, the trader would end up taking profits at a lower level or even exiting without any profit in case of a quick trend reversal. Therefore, greed is another personality trait that makes Forex traders fail.
Succumbing to Fear
Once a position is opened, the trader should allow the take-profit or stop-loss level to be reached. Instead, novice traders tend to change their take-profit and stop-loss orders out of fear. If the market starts moving against the open position, then novice traders usually change their stop-loss orders and vice versa.
Warren Buffett, arguably the greatest investor in history, once said, “You shouldn’t be in the stock market unless you can watch your stocks drop 50% without panicking.” The same rules apply to Forex. A fear-driven trader is doomed.
Neglecting Economic Developments
There is a lot of homework to do before placing a long or short position on a currency pair. You should study both the fundamental and technical factors of currencies before arriving at a trading decision. Neglecting important economic data and political events will result in an irrevocable loss.
Engaging in Blind Trading
Forex trading should never be done solely based on the recommendation of people whose reputation is unknown. In case a blind trade leads to a loss, the Forex trader will find it difficult to assess the cause of this loss.
Therefore, Forex traders who open positions recommended by unqualified people will continue on the path of ignorance. The most important reasons for a Forex trader to lose money were discussed above. Of course, there may be other reasons for a trader to lose money.
These can only be identified by a detailed study of his losing trades. Even the most experienced traders incur losses. However, good traders do not repeat their mistakes. This is the trait that leads them to success.
Conclusion: Learning from Losses is Key to Success
The most important reasons for a Forex trader to lose money were discussed above. Of course, there may be other reasons for a trader to lose money. These can only be identified by a detailed study of his losing trades. Even the most experienced traders incur losses. However, good traders do not repeat their mistakes. This is the trait that leads them to success.
