A question often asked among both experienced and beginner Forex traders is: why do FX traders lose money?
Honestly, it’s a very good question. But that’s if we assume that all FX traders follow the basic rules of successful trading and stick to their strategy through thick and thin. Sadly, that’s not always the case.
With the high volume of trades placed every day, there are bound to be overeager forex traders or impatient ones. The list of reasons to lose money in the FX market seems to be endless.
So, let’s dive in and discover the 9 most common mishaps and how to steer clear of them:
1) Improper or insufficient knowledge
When starting out as an FX trader, you need to arm yourself with facts. Do your research and find trusted sources to learn about fundamental and technical analysis, indicators, proper risk management techniques, forex trading systems, etc. Not paying attention to your FX trading education will only help compound your losses.
2) Poor choice of Forex broker
Not all Forex brokers are created equal. Before committing to a certain broker and opening a live account, make sure they are fully regulated and reputable. Then, research their forex trading conditions, account types, and leverage to make sure they can help you achieve your trading objectives.
3) Disregarding the importance of a Forex Demo Account
The practice account offered by your broker is there so you can familiarize yourself with the forex market and the trading platform, as well as build and backtest a reliable FX trading strategy. All this while not actually risking any capital!
Take advantage of all the features of your demo account and build a solid understanding of the Forex market before moving on to a live account. They say “practice makes perfect” for a reason!
4) Unrealistic expectations
Once you’ve learned about FX trading, chosen a reputable broker and practiced on a demo account, you will be feeling eager to move onto live trading. This is when you need a reality check to make sure you manage your expectations.
It’s especially important for novice traders to remember that forex trading is not a “get rich quick” scheme. Here, your patience and consistency are your best allies. As in every budding business, you will need to start small and work your way up.
5) Trading on impulse or emotions
As human beings, we’re not immune to the torrent of emotions that accompany such a high risk and volatile market.
Becoming fearful, greedy or over-confident can lead you to exit a position too early for fear of losing money. Conversely, you can overstay your welcome in the hopes of grabbing every last pip.
The key is to find a happy medium where you can follow your predetermined strategy, no matter what your emotions are urging you to do. This will save you plenty of effort down the road making up losses from impulsive trades.
6) Impatience or over-eagerness
To maintain a healthy trading track record, you need to start seeing patience as a strength and not a weakness. Sometimes, holding off from a trade can be more profitable in the long-run than chasing after every opportunity you can find.
7) Improper risk management
What can make or break your trading account is your risk management or lack thereof.
It’s widely recommended to never risk more than 2% of your total capital on each trade. This applies whether you’re a well-seasoned trader or just now opening your first few positions. Becoming over-confident and risking a higher percentage is a sure-fire way to quickly deplete your account.
If you neglect to use proper stop-loss orders, for example, you will have no way of mitigating risk and minimizing losses.
Other money management techniques, such as trailing stops, can help preserve your profits, while still giving a trade room to grow.
8) Not adapting to changing market conditions
One size does not fit all, especially when it comes to forex trading. Assuming that your one trusted strategy will be equally as successful for all trades will end up costing you money.
The good news is that forex market volatility can present not only new risks but also new trading opportunities. Keep room in your strategy for growth so you are more adaptable to change, and therefore, more prepared to take advantage of new opportunities!
9) Not keeping a proper log of your activities
Finally, you will want to be able to track your performance over time. This will help you amend your trading strategy as needed and catch any red flags that need tinkering.
Although it does require a lot of work, avoiding these mistakes is easier than it seems. Do your research, study the forex market and be ready to adapt to it. Be sure to prepare thorough forex trading plans and manage risk, and before you know it, you are on your way to proper capital management and profitability!