Despite being the biggest market in the world, only a small percentage of all participants of the Forex market make money. In other words, most people lose money so that a small percentage can take it. That does not mean that you should keep away from the Forex market, it’s just a caution to anyone who would like to get into the trade.
If you’re just learning about the Forex market, you’re in luck because this article will help you avoid the mistakes most of us have made. For those who have lost money in the Forex market, now you will know the mistakes you made. Believe me, there isn’t a successful trader who didn’t make most of these mistakes, but they learned from their mistakes.
Why are there so many losers?
It all comes down to how the Forex market works – money doesn’t come from thin air, but from another person’s mistake. Every trade you make, either a buy or sell position, requires another person to sell or buy the same commodity, so you’re basically betting against each other, and whoever is right gets the loot. If you start thinking of the Forex market in that sense, it begins to make a lot more sense as to why so many people lose money – they make the wrong bets.
If you think about it practically, let’s say you buy the GBP/USD pair, thinking that UK’s economy is about to grow. In order for the trade to happen, there has to be someone on the other side who makes the opposite trade. You never get to know who that person or institution is because you’re dealing with your broker, but that’s what actually happens. In fact, in some cases, some Forex brokers might even bet against you if they think you’re wrong, which is why choosing a Forex broker is very complicated.
Anyway, you now know that you’re losing money because you’re making the wrong decisions. Some of these mistakes are due to sheer lack of knowledge, but most actually have to do with psychology and human nature, like the following:
We’re all human, and that means we’re susceptible to emotions. These emotions can often lead to losses in your Forex trading career:
1. Adrenaline rush
When a trade goes well, making you a huge profit, it can be tempting to keep going, which is a normal psychological response toward a positive reward. However, most people start to assume luck is on their side and start to make rash decisions, hoping for even bigger profits, so they take bigger risks. The adrenaline of a profitable trade makes you feel invincible and this becomes your downfall, because forex trading has nothing to do with luck, instead requiring that you make informed decisions.
To avoid this trap, take a moment to reflect on your profitable trades, consider what you did right that led to the profit, then apply the same strategy in your next trade. Remember that the forex market is 24/7 and there should be no rush to make a trade, regardless of how excited you are; always pace yourself.
2. Hanging on to losing trades
You have to learn to accept a loss, even the best traders in the world make some losses, the trick is to make the profits outweigh the losses, not to eliminate losses completely. When a trade goes wrong, meaning that you’re losing money, it can be hard to accept the loss. At this point, an experienced trader will close the trade and accept that they made a mistake. Rookies, on the other hand will spend hours on their Trading platforms, observing the losing trade, hoping that somehow their luck will turn around and reward them with a profit.
This is among the most common problems because it plays right into our sense of hope and positive thinking. Traders who make this mistake end up watching as the losses increase and all their initial capital is wiped away with a stop order from the broker.
To avoid making this mistake, always know how much of a hit you can take in any one trade through a trading strategy; determine the amount of loss you can accept before making the trade and set it with a stop loss. Be confident in your decision and accept that everyone makes a loss sometimes so that you are not tempted to alter the stop loss.
Have you ever closed a profitable trade because the tide seemed to have been turning? Then soon afterwards, the trend you had predicted initially resumes, leaving you regretting why you didn’t hold on just a little while longer? This is also a major rookie mistake. Don’t you sometimes hate yourself when you can accept to take a $50 loss but then you’re quick to take a $10 profit? Well, this is also due to human nature; the, one in the hand is better than two in the bush mentality.
The problem is, if you keep doing this, you end up making bigger losses than profits, which is a recipe for losing. You need to be patient when a trade goes well and give it time to develop. Most trends will usually have a little dip somewhere as the big player in the forex market are testing the market. Watch out for the dip carefully because sometimes it might turn around, leading to even greater profits. If you can’t watch the screen consistently, setting a trailing stop will serve the same purpose.
It can be tempting to learn the basics and start trading right away with real money. Again, you will be surprised at how quickly you will lose all your money. While forex trading is risky, it is not gambling, instead it is a system that responds to market movement around the world. Learning the ins and outs of the trade, then learning how to study the charts is crucial to becoming profitable.
Even then, start with a demo account and practice various strategies so that you can develop your own strategies. The funny thing is, the most successful traders do the same things every day, because they have tested and perfected specific strategies that work for them. You need to develop your own strategies, but that takes time to learn.
It is advisable never to risk more than 5% of your capital in a single trade, and even with multiple trades, not to go above 10%. It is true, higher risks have higher rewards, but the downside to risking a huge chunk of your capital is losing it all. If, for example, you risked 20% of your capital on a single trade, then you would only need 5 losses to have your whole account wiped, and 5 consecutive losses are not unusual. Risking only 5%, however, would require 20 consecutive losses before you’re wiped out, and that is not likely. Therefore, realize your limits and risk only a reasonable percentage of your capital to avoid being stopped out.
Mistakes due to inexperience
Nothing drills crucial lessons into your mind like experience. Most traders have made these mistakes and learned from them. Luckily, they are the kinds of mistakes that can be so easily avoided unlike those to do with human nature:
6. Working with a bad broker
Right now, there are probably over a hundred Forex brokers who advertise their services hoping to attract clients. In this business, your choice of broker is crucial because they can either make or break you. The only way to find a good broker is to do your research, Forex broker reviews are essential because traders will share their experiences with certain brokers.
The best Forex brokers will have your best interests, and will offer the best spreads, won’t place too many trades against you and perhaps even provide you with relevant market information. Therefore, compare Forex brokers before signing up with one of them and depositing your money to avoid being swindled off your money.
7. Lack of a proper strategy
Every trade you place with your broker has to be planned; never make a trade on a kneejerk reaction to something you read online or heard on the news. Yes, these sources of information may be useful, but you still need to strategize once you have the information. There are 2 basic strategies, fundamental and technical analyses. The former involves watching out for news events in the Forex calendar while the latter is solely concerned with charts.
Some traders usually rely totally on one system or the other, which makes their trades less informed. For example, a technical analysis of the trend may point to a certain direction, but a news release a few minutes later will completely derail the trend. This is why it is important to keep abreast with both factors; study the real-time Forex charts carefully but also know which major announcements may come along soon afterwards that may affect your trade.
Take some time to develop a strategy for your trades before jumping at the buy or sell buttons. Over time, you will be able to implement your strategies quickly, but first you have to test the strategy to see if it works.
8. Indecision on a trading system
There are many ways to trade the Forex market such as through binary options, ECN, STP, CFD and typical Forex trading. Each of these systems has its own downsides and advantages, and you just have to select the one that best suits you.
Comparing binary options to Forex, the former is ideal for those who prefer long-term trades and perhaps do Forex trading as a side-project. For them, a binary options brokers rating would be a helpful resource. STP-model Forex brokers, on the other hand, cater to high volume trades and are best suited for those with significant capital. For scalpers and day traders, ECN execution Forex brokers are perfect because of the tight spreads.
Depending on the type of trader you are and your circumstances, you should select the system that best suits you and stick to it.
9. Trusting signals and automated trading
Some brokers and websites will promise to provide you with trading signals that will make you huge amounts of profit. All you will have to do is pay a little stipend and sit back as your capital grows. These signals are often integrated into your trading platform, so it’s very easy to activate them.
Well, they do work and they don’t, Remember, there is a person on the other end doing the trading for you and just like any other trader, they sometimes make losses. Keeping this in mind, it is never a good idea to hand over all your capital to a trading signal, start with a small percentage and increase it only if the signal is profitable.
10. Too much information
You would think that the more you know, the better it would be, but that often isn’t the case. The Forex market has a lot more to do with speculation that just facts, so browsing through different Forex blogs will often leave you confused. Every trader has their own opinion, and it is not uncommon to find conflicting opinions about a single currency pair. By bombarding yourself with conflicting opinions, you end up getting confused and more likely to make a mistake.
The solution is to find a reliable source of information, perhaps two just for confirmation. Look at their history of suggestions and how their predictions turned out, and if they are right more than they are wrong, then you can trust that source of information.
A day in the life of an experienced trader
You would think that a Forex trader with years of experience and a steady 20% monthly growth in capital would cluster their trading platforms with indicators and their web browsers with tabs from different Forex blogs, but the truth is the exact opposite. After years of trading, you will find that a profitable trader has been with the same broker for years, uses only one or two indicators, and places a maximum of 5 trades in a day. Learning from the mistakes above, they have managed to do the following:
- Identified a good broker
- Refined their trading strategy
- Researched thoroughly every trade they make
- Risked only a slice of their capital so they can confidently leave their computers without worrying about being stopped out
At the end of the trading week, the experienced trader will take time to review the week’s performance and strategizing on the upcoming week’s trades before going out for a drink.
Why the story of a successful trader?
Success can be achieved by mimicking the habits of successful people. Do not wait to learn from your own mistakes, but rather learn from others’ mistakes. Many people have tried and quit the Forex trading business because they made the above mistakes, you don’t have to quit just yet. Instead, adjust your mentality by avoiding the mistakes and adopting a successful lifestyle.
Here are some mistakes recapped by one of the top FCA regulated Forex brokers: