The forex market is unlike any other trading market in the world, and whilst it contains opportunities that some other markets simply do not, it also has risks and traps for new traders that conventional stock markets do not.
Because of this, forex is particularly prone to an economic form of the Pareto Principle; the top 20 per cent of traders make 80 per cent of the trades, either in trading blocks or due to the accumulation of capital.
The reason for this is that in forex you typically need a lot of starting capital to make money, which is why forex funding programmes are in place to help people who prove their worth on the market navigate it without bankrupting themselves.
However, traders in that 80 per cent who are struggling and losing money at this present moment might be doing so for a few different reasons, and with that in mind, here are some common reasons why forex traders lose money and what you can do to stop it.
Low Starting Capital
Whilst the dream of every trader is to start with a pound and turn it into a million in a story akin to One Red Paperclip, but the reality is that you need a certain amount of money to generate more money.
This is true enough on the stock market but this is even more so the case with forex, where the margins for winning and losing trades are much smaller because you are taking advantage of currency fluctuations.
This does not mean you cannot participate at all with only a little money, but it turns many
currency pair trades into all-or-nothing gambles, which leads to unacceptable levels of risk, extreme leverage, and makes a market ripple a devastating tsunami that can take you out of the market entirely.
It also means you are more likely to trade with an emotional mindset, jumping in and out based on fear and greed and hurting yourself more than helping.
Funded programmes are the best way around this as you can test your trading strategy and make much safer returns without fearing losing everything personally.
Failing that, you should not consider trading with less than £1000 you feel you can afford to lose.
Swimming Against The Tide
In many stock markets, the way to make a lot of money very quickly is to successfully bet against the market and swim against the tide, but we neglect to consider just how few people “beat the market” like this compared to how many lose everything in risky trades.
This is even more true in forex, and often it is best to trade with the flow of the market and reign in aggressive trading habits, which in turn reigns in disaster.
There is no such concept of easy money in forex, and when you realise this and shape your mindset around long-term success, you are far more likely to succeed in the long term.
Neglecting Risk Management
There is a saying in many sports, most commonly in American Football, that says that whilst an offensive approach helps to win games, a defensive approach wins championships. This also applies to the world of forex.
Your overarching priority is not necessarily to make a profit but not to wipe yourself out. The less capital in your account, the lower your chances of making a profit are.
This makes risk management the key to making money in the long run, which means setting stop-loss orders, keeping within acceptable risk tolerances, diversifying your trades and trading in reasonable amounts relative to your capital.
It is also about not succumbing to fear, greed or ego, getting out of bad trades or playing it safe in the face of high-risk, high-reward scenarios. You will invariably make more losing trades than winning ones, but it doesn’t matter if those multiple losses are wiped away by one big success.
Smart market moves and good timing will help you win individual trades. Effective risk management makes you a successful trader.
Refusing To Give Up A Losing Trade
Cutting your losses is the hardest act a trader needs to do every day, as it can feel like an admission of defeat and hit at a trader’s ego. However, it is a far better option than the alternative.
There is an infamous trader who claimed to have only gotten one pick wrong out of well over 400, but it turned out the reason for this was that he cashed any stock that made a successful gain and held on to junk-status picks if they never reached the price he paid.
He had a good winning record, but also lost a lot of money, eventually going bankrupt and going to prison.
The moral of the story is that losing a trade doesn’t matter compared to your overall account standing and whether you are ahead of the profitability curve.
Cut your losses and evaluate what happened with the trade and whether you made a bad move or simply were a victim of the financial equivalent of a bad beat.
Either you have learned a lesson or you were a victim of bad luck. Either way, cut yourself off from the trade and move on.
Getting Too Greedy
Trading emotionally is the destroyer of accounts and ender of careers, but whilst most people think of trading scared when they consider that, arrogantly trading out of greed will wipe your account out if you allow it.
Ultimately, it is fine to get out before the very peak pip of a currency pair, as it is much worse to hold a position too long than to exit your position and leave money on the table.
Markets move very quickly, so you should plan your moves in advance and avoid breaking them unless you are reacting to something particularly extreme.
The best way to avoid this is to evaluate your trades, estimate a reasonable profit position and be disciplined enough to not chase after the extra.
As well as this, maintain strict risk tolerances and keep your investments diversified. This will avoid the fixation on particular positions and therefore the temptation to get greedy and focus on maximising profit pips rather than long-term account health.
Wavering On Trades
Fear can be a very negative emotion for a trader, but whilst cutting off profitable positions early or not letting a currency pair rebound are not great but relatively harmless, there is one way that fear can be particularly destructive for a trader.
When you make a decision and open a position, stick to it and avoid indecision in your trading. All too often, traders will get cold feet with their trade, close it and open up the opposite position, only to find that your initial strategy was correct.
Every trade has several types of trading fees to consider, so you are slightly worse off, and can quickly chip away at your account until you lose your ability to make serious gains.
Fixate On Buying Dips And Selling Peaks
You hear the phrase “buy the dip” incessantly in amateur investing circles, largely from people hoping you will buy into their losing position and help them get out with only a minor loss.
In practice, buying currency pairs at their absolute lowest and selling at their highest is exceptionally difficult and any trading plan that focuses on perfect trades such as this should be subject to scrutiny.
Your account ends up with too much exposure and the chances are far more likely that a particular pair will continue on its trend, usually meaning more losses and stymied profits.
Assuming A Foolproof Strategy Exists
If you ever make a Google search for forex trading, you will see countless adverts from groups and individuals promising a “foolproof” strategy that will help you make money guaranteed with no risk whatsoever.
At best, these claims are misguided and ill-informed. At worst, they are outright lies. In either case, the only person making a guaranteed profit from selling “foolproof” trading systems, guides and strategies are the people selling the guides.
There isn’t an easy, quick-fix way to get into trading. If the market was that simple and lacked the volatility and variability that comes from millions of traders taking part every day, there would not be as much money to be made.
Similarly, in a zero-sum game such as trading, anyone with a “foolproof” system or one that is even very good and effective would surely keep it to themselves and make money themselves.
What you should try to find instead of trading strategies is the tools and knowledge to build your own. The rest is a mix of hard work, extensive research and a degree of luck.
Trying A Moonshot Strategy
Sometimes known as “you only live once” trades, moonshot strategies are extremely high-risk, high- reward trading strategies that simply do not work in forex, even if there is evidence of people lucking out in other forms of stock trading.
Forex traders make money in the long term by making considered trades that work with the flow of the market, and trying to gamble everything on profit targets only obtainable via a ridiculous black swan event is not merely gambling instead of trading, but betting on the number 00 on the roulette wheel.