Forex trading presents a promising ground for making passive income. Forex markets are open 24/7. You can trade from anywhere in the world and make money instantly. Forex requires a small amount to start with. It also allows margin trading with leverage. However, forex traders lose money on a large scale. In fact, 90% of traders fail at forex trading.
In this article, we will briefly discuss the main reasons why traders lose money massively.
Why Do Most Traders Fail?
There are a lot of forex traders who became rich with their trading. Every country has its own list of triumphant traders. Very few of them have had struck of luck. Contrarily, most of them had put hard work. They developed skills and learned the market very carefully before indulging in their ‘once in a lifetime’ trade.
Paul Tudor Jones, who is the richest forex trader in the world, built his corporation from scratch. He profited at 62% because of his short position during the October 1987 market crash. Today, Jones holds a net worth of $4.5 billion.
Although people like jones are from among us, however, most traders end up failing big. They lose even the capital with which they started.
How do you lose money in forex trading?
Successful trading demands effort and persistence. You can’t become a millionaire over-night. Developing the right skill and waiting for the numbers to turn in your favor needs time. Certainly, it is not an easy task.
Here are the reasons due to which you, as a forex trader, can lose money:
Most of the forex traders are not prepared. They come without a plan. And as the saying goes ‘failing to plan is a plan to fail’. This holds true in forex trading.
In order to avoid being unfortunate, prepare yourself before hitting the market. Develop a trading strategy based on your capital. Afterward, enter the market with the mindset of ‘learning and applying’.
Starting with Small Capital:
The lucrative business of forex trading has a history of a few lucky souls who earn big profits out of small investments. However, those are exceptions, not norms. Starting on small capital usually turns out detrimental in the long run.
People who start small get too emotional on every up or down movement of the market. Their stakes are too high. Additionally, traders opt for margin trading with leverage for generating big returns. This magnifies the risk.
Hence try trading only when you have significant capital and are willing to lose some.
Traders are indecisive in picking the trade. For instance, they choose a specific direction first. Now when the trade doesn’t become profitable immediately they quit. Nonetheless, they learn later that prior direction was right. So, they end experiencing guilt and remorse.
The above-mentioned example is one of classic greed. Of course, it is a part of human nature. But as a forex trader, you shouldn’t give in to greed. Else, failure will engulf your capital.
Poor Management of Assets:
Robert T. Kiyosaki in his book ‘Rich Dad Poor Dad’ gave one of the profound financial advice. He said, “It not about how much you earn, but how much you keep“.
This is true for the financial assets of traders in the forex market. Protect what you already have. Don’t lose everything. Place stop-loss orders. Get out when your trade is no longer making sense.
Sometimes forex traders lose money due to their egotistical behavior. As humans, we always try to prove ourselves right. But the truth is forex trading is too risky. You predict trading in a certain direction but the market starts moving the other way. So the right move is to accept that you were wrong and be careful next time. However, if you start blaming everything for your own failure then your ego will get in the way next time as well.
Traders who come with high expectations of rewards get disappointed too easily. They lose a few trades and get demotivated. Although, ‘winning and losing’ is part of the trade business.
Understand that in forex trading it is possible to lose even if you do everything right. You never know where or when the market will swing. Just do what you possibly can. Don’t give up after failures at the early stages.
Forex traders lose money due to trade addiction. The exciting, fast-paced movement of prices makes them emotionally attached to the market. Emotions are enemy of rational thinking. Consequently, traders start chasing prices which disrupts plans of trading.
Avoid addiction if you want to make profit. Stick to your plan and don’t let price drive you. Otherwise, you will be in a gamble.
Be smart in your trade. Know your limits. Successful traders know when to exit a trade. Some risks just aren’t worth taking. Plus, some times aren’t right for entering the forex market. So, wait patiently for the right time to trade.
Falling for trading systems:
Scammers are always there ready to eat your money. They know the psyche of forex traders. Hence you will see ads or comments of claiming that certain forex trading systems 100% works.
Traders looking for shortcuts easily fall for these systems. They waste money on buying systems only to realize that those were false claims.
As a forex trader, bear in mind that there is no substitute for hard work. There are traders who put their blood and sweat in understanding market indicators. Even then they keep losing every now and then. So, you can’t dope the market with a system. Do your own research and avoid entering rabbit holes.
Rigidness in Strategies:
Successful trading is a matter of constant learning. The forex market is volatile. It can go in unpredictable directions. Forex traders lose money when they are too rigid in their plan and trading strategies.
You should always remain open to new knowledge about the market. Understand the difference between a ranging market and a changing market. No one can be a ‘know it all’. So, adapt to the changes along the way. It isn’t always about winning. Sometimes you improve your trading practices as a result of the failure. Those failures bring you closer to long term success.
Can you lose more than you invest in forex?
Yes, with poor trading plans it is possible. Actually, it is common that forex traders end up losing more than their initial capital due to leverage. That’s why forex trading is risky. It can make you or break you financially.
To learn more about forex trading tips follow our blog.
This article will help you understand ‘why do 90% traders fail’ in forex trading. The truth is traders are their own worst enemies. Their emotions, impulsive behavior, and race to earn big profits land them in trouble. Forex trading is hard but traders make it harder for themselves.
The key to success here is avoiding pitfalls where most have fallen. As the saying goes,
“Smart people learn from their mistakes. The real sharp ones learn from the mistakes of the others.”