There are loads of different answers to this question. In this article, we’ll take you through some really common reasons why forex traders lose money. We hope they’ll help you avoid making the same mistakes.
Why forex traders lose money – it’s part of trading
This reason is probably at the top of the pyramid. The simple fact of the matter is that no trader wins 100% of the time. Good traders know this and accept it, which is why they follow good risk management practices. Nobody obviously wants to lose money, but good traders realize that you can’t have a rainbow without occasionally getting rained on.
The only way you can guarantee against forex trading losses? Don’t trade.
They don’t manage their risk effectively
This is another major reason why traders lose money – they take on too much risk. If you don’t respect good risk management practices, you may lose a sizeable portion of your account. You could even lose so much that it’s not really worthwhile or even possible to continue trading.
They don’t have a strategy
Well, this one just speaks for itself. Forex trading without a strategy is little more than gambling.
They have unrealistic expectations
This is ultimately catalyst behind poor risk management. Forex trading is not a get rich scheme. Success in this industry usually comes from being prudent and consistent.
Being successful is like crossing stepping-stones in a river. Trying to build your account with great leaps is like stepping-stones in a river which are far apart. Perhaps it’s not impossible to get to the other side, but the odds that you fall in are really high. However, if the stones are close together, it will take more steps and more time to get there, but the odds that you fall in the lake are much lower.
They over-leverage their account
Leverage is an incredibly powerful tool. It allows you to hold much larger positions than you’d otherwise be able to. It’s what enables you to benefit from those tiny changes in price, without necessarily needing to have tens or even hundreds of thousands of dollars in your account.
But leverage is pretty much the definition of a double-edged sword. Just as you stand to gain from those magnified trades, you will also incur the same proportion of loss if the price moves against you.
It’s quite common that inexperienced traders set their leverage too high. This is a recipe for disaster. Even small changes in price risk a margin call, and blowing the account. Don’t do this. If you’re not profitable when trading with low leverage, there’s no point even thinking about trading with high leverage. It could cost you a fortune.
Why forex traders lose money – emotional trading!
This is another huge reason why forex traders lose money. They trade based on their feelings, rather than strategies and decisions based in logic. An obvious example of this is greed.
When you consider entering a trade, you should consider what you stand to lose before you drool over what you stand to make. Remember, in order to actually be a trader, you need to maintain your capital. Preserving it should be your priority at all times.
They fail to calculate position size correctly
This is a key component of good risk management. Traders can make this mistake either due to a calculation error, or because they take too big a position, based on how much money it could make. However, they fail to properly consider how much it would cost them if it failed.
They fail to account for high impact news
A big mistake, or at least, a big risk, is trading in the run-up to a meeting or press conference whose news is going to have a sharp impact on the market. It’s a risky idea to trade on the brink of, or during, times of high volatility. It could be better to sit things out and wait. It may be easier to see a clearer path ahead once the dust has settled.
They don’t pick the best forex broker
No two forex brokers are the same. Make sure you do your due diligence to confirm that the broker you’d like to trade with is reputable. Take the time to review the different types of account they offer, and what sort of spreads and leverage you can get, as well as any commission and swap fees.
They don’t use demo accounts properly
We have a whole article devoted to this topic, because we think the word “demo” account is a bit of a misnomer. Demo accounts aren’t just a way to demonstrate how trading works. They are a real, functional platform that allows you to test trading strategies without risking your own money. If you can’t trade profitably on a demo account using good risk management practices, then trying to do so using real money is likely to be costly.
Why forex traders lose money – overtrading
Chasing gains that are fueled by unreasonable expectations, or trading too often could expose you to too much risk. Good traders know that they don’t need to try to get in on every opportunity in order to be successful. Not everything that glitters is gold. Which is better, a multitude of successful and unsuccessful trades that leave you 9 pips up for the day, or one single trade that gives you 20? We know which we’d pick.
They don’t adapt to market conditions
Just because a strategy works under one set of circumstances does not guarantee that it will work under another. You should be prepared to adjust to market conditions so that you stand a chance to convert new risks into new possibilities.
They don’t keep a journal
Information is a forex trader’s best friend. Good traders keep a note of everything they’ve done. They keep a record of why they entered a trade, if the market moved as they anticipated, and what they did wrong if the trade didn’t go in their favor. This will help them to keep hold of the things they are doing well, and avoid errors in future.
Why forex traders lose money – they don’t learn from their mistakes
This one is a symptom of the previous mistake. Einstein said that the definition of insanity is doing the same thing over and over, and expecting different results. Mistakes in life are often repeated in life until they are learned, so be sure to take each one as a learning opportunity as best as you can.