Take look at any Forex broker site and on the ones which publish the number of clients who lose you will typically see 70 – 85% but this doesn’t include accounts that are totally wiped out and unlikely to recover.
Around 90% of all Forex traders lose money so what is the single biggest reason that causes traders to lose when trading Forex markets?
The single biggest reason is the vast majority don’t research a trading edge for themselves – if they did, they would understand common trading mistakes to avoid and also how to build a strategy to win.
Most traders just pick a strategy online but don’t research it and the majority of Forex education online focuses on promoting techniques that simply won’t work in the real world of trading.
If you do your research you will see which techniques work and what you need to do to win.
Below are the most common mistakes that will lead to losses and most losing traders will make one or all of the mistakes below.
Short Term Trading
There is a lot of information online telling you that you can make money day trading and scalping on lower time frames i.e. Trading off an hourly, 30-minute, or even a minute chart. If you try this you will fail to make money.
In terms of market noise, it varies from pair to pair but as a rule of thumb most majors can see 100 pips a day in terms of a trading range and most of it is noise. The day trader or scalper trying to trade in low time frames is doomed to fail over the longer term.
The only group of day traders who make money are professional traders using High-Frequency Trading Systems which rely on speed to win.
They can act on price before humans, for example, the best high-frequency trading programs can execute hundreds of trades in milliseconds or the time it takes to blink your eye.
These programs hunt the stops of retail traders and create a lot of volatility in short time frames.
Technical Pattern Trading is Popular and a Great Way to Lose Money
One of the most popular ways of trading Forex is technical analysis and in terms of technical trading strategies, most traders pick a pattern trading strategy.
The logic is a past pattern will repeat in the future, it looks convincing but you see only the patterns that work not the ones that didn’t.
There is a huge industry in teaching patterns and it has a big appeal just spot and trade a pattern to make consistent profits but the reality is you won’t make any money.
No professional trader would use this method of trading but it’s probably the most popular method for beginners coming into trade the markets.
Confusing Risk to Reward With Probability
A trader will often want to risk say 50 pips on a trade and look to make 200 in profit and calculate their risk to reward on the trade as 4:1 but it isn’t – why?
Because you need to take into account the probability of the trade succeeding.
For example, if you traded with a 10 pip stop loss looking for 40 pips in profit, the probability of the trade working out is very low over the long term because Forex markets are very noisy and the stop will be hit the majority of the time.
Traders who are successful know their edge and calculate the probability of success within their strategies parameters but they also know that any trade can go wrong so employ strict money management rules which are important in terms of coping with the random distribution of profit and loss.
Not Understanding Random Distribution of Profit and Loss
In terms of trading your trading strategies edge, it can work over the long term but you need to ride out the periods when your strategy is taking losses and these losing periods can last a lot longer than most beginners think.
There are a lot of educators who claim you can make a regular weekly or even monthly income from Forex trading but this is not based upon reality.
Most successful traders will face many months of drawdown or losses at some time and a losing month is common.
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In fact, if you look at most successful traders the majority of their profits in just a few months of the year with the other months yielding marginal profits or losses.
In terms of profits to losses, successful traders are aware of the 90/10 law which is around 90% of their profits will come from just 10% of their trades.
This means that 90% of trades will give minor profits or losses.
This simple rule shows the importance of focusing on the longer term and having good money management so the strategy can yield profits long term.
Too Big an Exposure to Losses
Most beginners and retail traders will take too much risk and lose their equity so what is too much risk?
Exposure of over 10% will expose your chance to a high risk of ruin.
Successful traders will be risking around 5 – 8% of their account and most will cut their exposure if their account equity falls.
Most losing traders when losing try and get back their losses quickly and increase their exposure which leads to bigger losses and very often an account wipeout.
Emotional Control & Discipline – Relies On Confidence In a Trading Edge
Any trader who doesn’t have a trading edge they are confident in will have a tendency to let their emotions get involved which will see them run losses, cut profits too soon, and overtrade.
A trader with an edge will know they have to be patient, and trade only the best opportunities. They will also understand the importance of keeping losses small and running their profits.
Professional traders view FX trading as a business which means small losses are inevitable just as they are in any business all businesses have an overhead which are losses.
On the other hand, they also know just like any successful business their edge or competitive advantage will prevail longer term to give them a profit and cover their overhead.
What You Need to Do To Win
If you want to become a successful Forex trader and win, do your own research so you can find an edge that you are confident in and can apply with confidence and discipline.
If you want to win at Forex trading treat it as a serious business, not a hobby! If you want to avoid the number 1 reason that causes the majority to lose when trading you can, it really is that simple.