Why do traders lose money?
You might be interested in stock trading but are not considering it because you have heard and seen that traders lose money. It is a commonly known fact that forex traders mostly fail; almost 96% of forex traders lose money and end up quitting.
Retail traders are people who speculate on financial markets and, because the prices are changing all the time, it is a risky affair. Like all business, trading requires hard work, knowledge, patience, investment, and dedication to succeed.
However, if you take care of the following things and improve your trading process by incorporating these elements, you can prevent yourself from losing money.
Low Start-Up Capital
Most currency traders begin by looking for a means to make easy money or to get out of debt. It is common for marketers to encourage traders to trade huge lot sizes and utilising high leverage to make massive returns on a tiny amounts of initial capital.
You must have money to make more money, and it is possible for you to experience enormous profits on limited capital in the short-term. However, with a small amount of capital and huge risk due to too-high leverage, you will become emotional with each up and down of the market and jump out and in at the worst possible times.
You can solve this problem by not trading with a tiny amount of capital. This is a difficult issue to get around for someone who wants to begin trading on a shoestring. $1000 is a reasonable amount to begin with if you trade micro or smaller lots. Otherwise, you are pushing yourself in a potential disaster.
Failure To Manage Risk
Risk management is crucial for survival in forex trading. Many traders lose money because they are unable to manage risks. You can be a highly skilled trader and still fail due to poor risk management. Your primary is not to make gains but rather secure what you already have because as your capital is diminished, your ability to make profits is also lost.
To counteract this threat and employ good risk management, you can choose to place stop-loss orders and move them once you make a decent profit. Use lot sizes that are in harmony with your trading capital. Most of all, you must get out of a trade if it no longer makes sense.
Indecisive Trading
Sometimes you might discover yourself suffering from trading remorse. This occurs when a trade that you open is not immediately lucrative and you believe you’ve chosen the wrong direction. Then you decide to close your trade and reverse it, only to watch the market go back in the initial direction that you selected.
In such a case, you need to choose a direction and stick with it. Switching back and forth will just cause you to continually lose small bits of your account at a time until your trading capital is depleted.
Giving In To Greed
Some traders feel that they must squeeze every last pip from a move in the market and this is the most common reason why traders lose money. You can make money in the forex market every day. Trying to seize every last pip before a currency pair changes can cause you to maintain positions too long and set you up to forgo a profitable trade.
The solution is obvious here: you must not be greedy. It is fine to shoot for a decent profit but there are several pips to go around. Currencies move everyday so you do not need to get every last pip, as the next opportunity can be right around the corner.
Denying Being Wrong
Many traders lose money because the market didn’t do what was expected, and they always want to be right. However, one cannot be right all the time. As a trader, you have to admit being wrong sometimes and move on instead of adhering to the idea of always being right and ending up with a zero-balance trading account.
It can be a difficult thing, but sometimes you have to accept that you made a mistake. Either you got into the trade for wrong reasons, or it didn’t work out as per your plans. Either way, its best to simply accept your mistake, dump the trade, and proceed to the next opportunity.
Trying To Pick Bottoms Or Tops
Many new traders try to choose turning points in currency pairs. Traders will place a trade on a currency pair, and as it continues to move in the wrong direction, they keep on adding to their position being positive that it is about to reverse this time.
If you trade this way, eventually you will end up with much more exposure than you planned in addition to a terribly negative trade.
It is best to trade with the trend. It is not worth the boasting rights to know that you selected one bottom correctly out of ten attempts. If you feel the trend is going to turn, and you want to take the trade in a new potential direction, wait for affirmation on the trend change.
If you want to select a position at the bottom, you should pick up the bottom in an upward trend and not in a downward trend. If you wish to open a position at the top, select a top when the market is making a corrective money increase, not an upward trend that is a part of a larger downward trend.
Purchasing A System
There are several forex trading systems on the internet for sale. Some traders are out there searching for the ever-elusive 100% accurate forex trading system. Those traders keep purchasing systems and trying them until finally giving up, deciding that there is no path to victory.
As a new trader, you must admit that winning at forex trading requires work and patience just like anything else. You can find success by making your own strategy, method, and system instead of purchasing worthless products available on the internet.
The Bottom Line
Apart from the above-mentioned elements, there are a number of other reasons why traders lose money and quit the market. One of these is that they depend too much on luck and completely forget about strategies and schooling themselves about trading. With proper strategies and sufficient knowledge, you can avoid mistakes and instead make gains.
Other reasons why traders fail are: trying to trade too many markets and not giving enough time to a single one, following the experts and the crowd blindly, not using stop-loss orders, borrowing beyond their limits, treating trading as a hobby, and not giving enough time to trading along with placing huge bets.
It is important to understand that the trading market is dynamic and unpredictable as well as involving huge risks. However, you can earn profits by analyzing the market thoroughly, not being too emotional, and recognising the right opportunities to enter and exit a trade, along with taking care not to make the aforementioned mistakes.