The forex market is extremely risky.
In fact, on average between 74% and 89% traders lose money when trading complex instruments such as forex and CFDs.
But why do they lose money? In this article, we have grouped the main causes why most forex traders fail along with tips on how to reduce risk rates.
1. Trading without having a clear strategy in mind
In forex trading, there are different types of strategies that forex traders can use to take advantage of price changes in the market, and trading without a clear one in mind is often a cause of losses.
In any case, one should not confuse having a trading strategy (or multiple trading strategies), and never change things on the fly in case one strategy (at any given time) turns out to be unsuccessful.
A good trader should not only follow the trading strategy that he thinks is best for him, but should also know whether market conditions allow him to implement it successfully, and whether his individual skill as a trader is sufficiently advanced for that type of strategy.
2. Trading without respecting the forex market
The forex market is the largest in the world, moving over 7.5 Trillion USD every day in volume.
Joining the forex market with an order of a few hundred USD, means being at the mercy of the market and its mood.
This is why you need to know when you can try to beat the market, and when it is simply better to stay away from it.
During forex market hours there are times when it is best not to open and close orders due to excessive volatility, such as times of day when the European Central Bank or the U.S. Fed update currency interest rates.
Volatility at these times can be so high that even the most liquid forex brokers cannot cope with the demands. This can cause spreads and trading costs to increase, but more importantly, due to market conditions, the broker might not be able to close the orders you have opened even if they are at a loss.
To monitor these events, forex brokers always provide an economic calendar.
3. Trading forex without trying to improve
Creating a good forex trading strategy requires a lot of effort not only to study, but also to understand why a trade was profitable or went into a loss.
When a trade goes into a loss, one should not blame the market, the broker, or other factors, but should try to understand why a certain decision was made, and what could have been done differently.
This also does not mean that the trader should always take the blame in the case of a trade gone wrong: sometimes the choice may be correct on a theoretical level, but because the forex market is extremely volatile, initial conditions can vary so much that the trade could take the opposite direction from what was predicted.
However, when a trade is positive, there is always something that can be learned or improved. For example, one can reason about whether that trade was positive by accident, or the initial technical analysis was wrong and the outcome was lucky.
Or one can reason about how the SL and TP orders were entered, so as to see if there was additional margin for profit, or if the SL was too wide.
4. Trading without studying first
One of the causes many forex traders lose money in forex trading is lack of knowledge about the market, trading techniques and how to manage risk.
In fact, before you start trading with real money, you should study the theory and focus on a demo forex account to practice without risk.
Although the demo account is not 100 percent accurate when it comes to mimicking the problems of a real market, it can come in extremely handy when it comes to identifying candlestick patterns, and training yourself to make the correct decision, set SL and TP orders correctly, as well as understand which chart analysis tools best suit your needs.
If you are a total beginner, try taking Babypips’ forex course, and then move on to books, and once you have achieved a deep understanding of the market you can start following professional traders like Andrea Unger for further insights.
As for books, you can check out “Trading in the Zone” by Mark Douglas or “Market Wizards” by Jack D. Schwager.
5. Bad leveraged trading practices
Leverage is a double-edged sword because it allows you to multiply your gains, but at the same time it also multiplies your losses in case things go wrong.
New traders and retail traders, generally only want high leverage because they only think about the upside of trading, and therefore they don’t think about improving their poor risk management.
However, they will start thinking twice once they realize that any successful forex trader think first about what the risks are, and only then about the gains he/she can make with his/her trading strategy.
A losing trade with a poorly placed stop loss (or not placed at all) and high leverage can be able to wipe out an entire trading account in a matter of minutes.
Learning how to manage risk in trading is therefore vital. One needs to understand from time to time how much leverage to use, the trade’s lottery, as well as how and where to set SL and TP orders.
As shown by the image below, setting a stop loss correctly will allow you to not only protect your trading account, but also limit your losses should the trade go wrong.
6. Wrong psychological approach
Another reason why most retail forex traders fail is their psychological approach.
In fact, although forex trading is an activity highly marked by experience, knowledge of technical analysis and market events, psychology plays a key part in all of this.
A good forex trader always makes cold-blooded decisions, regardless of any negative emotions.
Stress, greed, adrenaline, fear and anger are in fact the worst advisors when it comes to making a decision, and unfortunately they are very easy emotions to feel when trading.
As with any activity, you therefore need to find your mental and physical balance so that you know when you are able to make a lucid decision, and when it would be better to avoid overtrading and resume trading the next day.
Precisely because of these reasons, a number of services have sprung up over time that allow any trader to trade forex (and other markets) by automatically executing trading positions in their account.
Professional and experienced traders use automatic trading strategies that make use of algorithms, while retail traders prefer brokers that offer copy trading, which is a service that can have them copy the actions of more experienced traders.
7. Not monitoring the EAs properly
Forex traders who make use of EA for their automated forex trading strategy know that algorithms are made to do what they are told.
As a result, they will continue to follow the account owner’s trading plan no matter what happens in the market.
A good trader can recognize when the market is adverse, and potentially dangerous even for the algorithms.
In such cases, it is simply best to deactivate EAs on your account, and reactivate them when the market is more favorable.
8. Forex brokers’ poor technical parameters
Sometimes new traders have good money management, a solid risk management strategy, a decent trading plan, but they make one mistake: they start trading with the wrong forex broker.
In fact, In addition to the psychological and practical side, there are also technical sides to consider, namely:
- Server latency
- Execution speed
- The spread
Latency: when trading online, one communicates with brokers through the Internet. The click, therefore, is not received immediately by the broker, because it must first be processed, and then passed to the broker’s servers. The further away a broker has its servers, the higher the latency, and the longer the delay between the click and the execution of the order. So if a UK resident trades with an Australian broker, he should expect very high latencies and lousy accuracy in trades. In contrast, he may have a better experience with a UK broker.
Speed of execution: once the order has arrived at the broker with a delay due to latency, the order will then have to be executed. Here the broker will require additional time to execute it properly. However, by choosing a broker (such as ECNs) that has good liquidity, these times can be reduced improving trading performance.
Spreads: the spread is extremely important not only because it is a cost, but also because there are trading strategies that require very low spreads in order to execute properly. For example, for the same performance, a scalper who trades with low forex spreads will perform significantly better than a scalper who trades with high spreads.
What insiders say about losing money in forex trading
Andrea Unger – Forex trading world champion
“So how much can we actually afford to lose? This is subjective and depends on many factors, from our risk profile to the type and number of strategies that we intend to use. However, a good, sensible rule suggests a starting point of 2% per trade.”
Filippo Ucchino – Professional forex trader, CEO of InvestinGoal
“The thing I felt most while trading forex was the pressure of recovering from the losses right away. When this happens you start raging and you stop following your rules, you use higher lot sizes and you don’t set up the trades properly. This whole thing doesn’t have a good ending because you just make things worse, and that’s how you start to lose money. When I finally realized that losses were part of the game, and I started considering them the “counterpart” to positive trades, then things got a lot better. You always try not to take a stop loss, but when it happens you accept it, and move on.”
Mark Douglas – Professional forex trader, author of the book “Trading in the zone”
“When you achieve complete acceptance of the uncertainty of each edge and the uniqueness of each moment, your frustration with trading will end.”
Sami Abusaad – Professional forex trader
“Are you willing to lose money on a trade? If not, then don’t take it. You can only win if you’re not afraid to lose. And you can only do that if you truly accept the risks in front of you.”
Strategies and tips to reduce the loss rates
Generally, the best trading strategies take into consideration several factors including:
- The trading style
- The rules of entry and exit
- The risk management
Trading style: there are many styles and types of trading in the forex world, such as scalping, hedging, swing trading, carry trading or day trading. Therefore, it is important to choose a trading style that is compatible with one’s goals, character, and one’s own risk appetite.
Rules: an important part of one’s trading style is finding entry and exit points for trades. This decision does not have to be made intuitively, but must follow precise rules based on technical analysis or with the help of indicators. For example, a swing trader may decide to open long or short orders based on engulfing patterns as shown in the image below.
Risk management: before even thinking about profits, you need to think about protecting yourself in case things go wrong. Setting SL and TP orders, for example, can make the difference between a profitable and an unprofitable trader.
About The Author