Why Do Most Traders Lose Money Trading Forex?
If you aren't new to trading, especially forex trading, you'd know that the majority of traders lose. To put a number on it, roughly 90% of day traders lose their initial investment within 6 months. Now, while some of this has to do with the brokers scams and misleading education that they put out there for the sake of their own profit, it also has to do with the traders as well. In our IDDA approach to strategy development, we attribute the reasons why most traders lose money, to 9 key factors.
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9 Reasons Why Most Traders Lose
1- Most traders lose, because they don’t treat forex trading as an investment
Sure, the forex market moves often and it is open 24 hours a day, 5 days a week. But this doesn't justify NOT treating forex trading as an investment. It is very tempting to get into way too many positions at once, without considering your risk-tolerance, just because the markets are open and moving.
However the fact is that reaching your targets take time and need just as much, if not more, analysis than investing in other markets such as stocks or ETFs.
2- You think trading forex is a get-rich-quick solution
This mindset doesn't work to begin with, in any type of market or business. You can not expect to consistently make great returns without carefully setting up your goals and taking the essential investment planning process to achieve those goals.
3- You don’t understand the risks of trading
Forex trading risks not only include incredible amount of volatility traders could face with no prior notice, but also the fact that traders have large amounts of leverage at their disposal. Using large leverage is one of the surest way to blow up your account in the minimal amount of time.
Other investment instruments have their own set of risks that can be identifies through Beta(β) and Standard Deviation (σ).
Traders must consider risk vs. return of their portfolio before developing an investment strategy.
4- You don't know your risk tolerance
Knowing the market risk is not sufficient when it comes to developing winning trading strategies. You must also know your OWN level of risk tolerance in order to develop an investment strategy suitable to YOUR needs. Your risk tolerance is calculated through identifying your ability to take risk, as well as your willingness.
5- You stick to your screen all the time
Day trading and staring at your charts all the time, bring out the worst fear and greed emotions out of people and you may end up losing ALL your money. We are all humen. And if we follow the markets ALL THE TIME, it is super easy to get emotional about our losses, and just to prove that we are not a loser, get into another wrong trade. In our free workshop "3 Secrets to Making Your Money Work For You (Without Having to Stick to Your Screen All the Time)" we cover this thoroughly.
6- You only listen to the news when making a trading decision
Another deadly mistake many traders make, is listening to financial news all day long.
You've got to remember that most news channels get paid based on ratings, so they need to keep the audience engaged. Most of the time, they do so by creating unnecessary drama out of thin air. That will again, push traders to make speculative trading decisions, rather than decisions carefully developed based on their financial goals and risk tolerance.
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7- You only follow your heart and intuition
You have a feeling the markets are going to move in a certain direction?
Good on you! But guess what. Your feelings are probably either mood swings or testosterone. Sure enough, there is a 50/50 chance that your feelings are correct -- after all, the markets can only move in one of two directions; Up or down.
However only following your intuition when trading is probably of the dumbest things you could do to your money. If your feelings were right, chances are, you're going to get overly excited about your wins, think you are the Nostradamus of the markets and place a foolish trade right after.
NOTE: There is only one condition when you could consider your gut feeling before executing your trade. That is, after you have completed all the other 4 steps of the IDDA.
8- You only do technical analysis
Technical analysis is nothing but understanding the markets' psychological levels. Forex strategies rely more heavily on technical analysis comparing to other investment instruments. Personally I try to find minimum of 3 chart patterns to back-up the market direction, and then use the Ichimoku - Fibonacci combo to identify entry and exit levels.
However, technical analysis alone is not sufficient. Traders must have an understanding of the fundamental developments, as well as their risk tolerance, before incorporating technical analysis into their investment strategy.
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9- You are not educated to trade
You watch a Wall Street movie, or hear a success story about a billionaire trader. You decide to give it a try. After all, how hard could it be? You'll simply make a bet on which direction the markets are going to move and go heads in.
Unfortunately, if this was how things worked, there would have been WAY more billionaire traders out there.
Is it rocket science? No.
But it sure is some sort of science. And without having proper education before trading, you might as well take a trip down to Las Vegas and spend $10,000 on a chip. The odds of you winning the jackpot are roughly the same as creating wealth through investment without proper education.
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