Forex trading has been around for centuries, and in recent years, many retail traders have taken to the forex market with the hope of making some profits. However, here is a dismal statistic: the consensus, on the conservative side is that around 70% to 80% of all forex traders lose money. I’m saying conservative, because some people have also claimed that, as much as 90% of all forex traders lose money.
This is certainly shocking for me to hear, and maybe for you as well. You may think that this severely dampens any of your hopes in making it as a trader, or it may motivate you to become that other 10%. Whatever you’re thinking, it’s essential to examine why forex traders aren’t making money and where they’re going wrong.
Below are five mistakes that most forex traders make that lead to their demise.
- Going too big, too soon
The first mistakes that forex traders make is that they go too big, too soon. Many traders do sufficient research on the markets and gain a bit of experience on a demo account and believe they can predict the markets accurately. Then they go all in, or they risk a significant amount of capital, hoping to hit the jackpot. Truthfully, however, this strategy does not work and can set you up for massive failure. If the forex market was so predictable, everybody would be bringing home the dough.
Beginner traders should not risk more than 1-2% of their overall account funds when they are trading. This may sound like an incredibly small number, but it makes sense. While you can always gradually increase the size of your position as time goes by and you gain more experience, you can’t rewind and whittle down your losses.
- Not having a trading plan
Another reason people lose money on trades is because they don’t know what their game plan is, and they don’t really care to find out. A lot of retail traders believe it’s enough to know what their plan for the day is, and that if they just repeat the same actions repeatedly, a trading plan will formulate by itself. However, this, again, is a reason for failure.
You cannot start trading without knowing what you’re working towards. Before you enter a trade, you need to have mapped out an exit strategy already. You should also know what boundaries you have when it comes to trading and your risk tolerance. You should never decide to hop into trades because they are convenient or trendy.
- Never reviewing past trades
One thing that is paramount to forex trading is reviewing past trades. Many traders who lose money simply move on and hope for better luck next time. This is a terrible strategy. Taking the time and effort to see where you went wrong in your last trade can help prevent you from making the same mistakes down the line.
If you are a new forex trader, you can always keep a physical journal (or use your notes app) to keep track of all your trades. You should take note of trading conditions, your position sizes, and how exactly you managed to make a profit or incur a loss. Over time, you will gain more self-awareness as a trader, and you will be able to catch yourself making a mistake before you make it, saving you time and money.
- Having unrealistic expectations
Forex is not a get-rich-quick scheme, as much as some traders may believe so. It may seem like an exciting endeavour – getting to make money just by analysing charts and clicking buttons on your smartphone. However, it is much more complicated than that, and if you expect that you can make a big pot of gold the first couple of times you trade, you are in for a nasty shock when reality sets in.
The truth is, in trading, you need to understand that you only get as much as you put in, and you will incur losses from time to time. Do not give up just because the markets went against you that one time. Instead, cut your losses and keep moving forward. Learn more about the markets, be content with small wins, and treat forex trading like the marathon it is, instead of a sprint. From there, you can slowly accumulate earnings.
- Being swayed by emotions
Forex trading ideally should be done without excessive emotions. Even when traders have a trading plan, many of them fall victim to being swayed by sudden on-set emotions and make impulsive decisions. Fear and greed can cause you to make choices you would never otherwise make, and it’s important to keep your emotions in check when you are placing trades.
Always think through your transactions. Do not be afraid of missing out. Follow your trading plan consistently and carefully, and if you are feeling overwhelmed, take a break from the trading platform and come back when you are feeling calmer. Remember that trading is not something you have to do. You can always stop when you want to. There is no fun being stressed out about something you are supposed to enjoy.
With all that said, these five mistakes may be the most common amongst forex traders, but they are unfortunately not the only ones. The most important thing when trading is to know yourself and the markets well and be consistent and realistic in your trading. Also, remember that you can always walk away if you do not want to trade anymore.