WHY Forex Traders Lose Money and HOW to Win in FOREX
Most people trading will come across the well-known statistic that 90% of traders fail to make money consistently when trading the markets
How You Can Quit Your Job and Live the Forex Trading Lifestyle
Forex trading is also one of those careers that allow the trader to work from anywhere.
There are many successful forex traders who have made a lucrative living through trading and have a retirement fund that can sustain them for the rest of their lives. Forex traders only need a laptop or mobile device with an internet connection, and they can trade from anywhere in the world.
The forex market is open 24 hours a day, 5 days a week but traders work on their own schedule and they can spend as much time as they want analyzing the markets before making trades.
This statistic shows that over time, 80% of traders lose money, 10% break even and only 10% make money. This stays the same regardless of factors like where you are from, your age or gender. Forex trading is difficult with high risk of giving up due to unpredictable profits.
In light of this, Forex brokers have been giving their customers the option to trade binary options as a way to make more predictable trades with a lower risk. This type of trade can be done through a binary broker that will give you an even payout on either a Yes or No question.
The thing that most people don't realise is that the top 10% of traders who make money in the market, don't do anything special. They focus on their trades and work diligently to achieve this coveted status and the prize attached to it. (Since ( (we) ask those present if they want us to teach them what the 10% of traders know or what the other 90% know and every time they ask for the 10%) we go over...) we go over. When it comes to trading, it seems like a lot of people in the 10% bucket don't understand the reality. Why is this?
To be successful in trading and in life, you need to learn from the mistakes that unsuccessful people commit or avoid making them yourself. You need to Do What the Majority of Traders Don't Do. It may seem easy but it is the most difficult thing in the world. And how am I supposed to know what to do, if I don’t know anything! One minute I will read that trading of stocks and shares is the way to go and then someone tells me that trading of commodities such as oil or gold is better than trading stocks.
We'll explore the reasons traders tend to make money inconsistently, including futures, commodities, etc. You should avoid falling into the 90% of unsuccessful traders by implementing the advice given in this article. Follow these steps to start trading your way towards success.
The solution for successful trading of a financial market is simple and can be broken down to a simple equation: Understanding + Practice + Discipline = Success in trading. The best traders are those who have been making money from trading for a long period of time. We would not classify those who have made good decisions in the face of one or two losses among successful traders. We would rather count them alongside other people who managed to make an exceptional decision with which they saw great potential, in this case hitting the jackpot. We spoke with all the successful traders we could find and they all mentioned following steps similar to the ones below.
Phase 1: All of them had to make sure they were well informed and had a good grasp of the trading material.
Phase 2: Just after getting a firm grasp of the basics, they went on to become a successful trader through a combination of experience and practice.
Phase 3: Having knowledge is pointless without action, so be sure to take that into account when putting theory into practice.
A trader needs to be disciplined and develop a real passion for the craft. Anyone can learn about trading theory from a textbook but if they don't develop an emotional connection to their work, they're not likely to be successful. Another misleading statistic that often gets propagated is the idea that learning to become successful at trading takes 2-5 years. We don't agree with this statistic as it sets an artificial limit on your potential. Everyone can find success in their desired industry depending on how hard they work, which is all it takes to find the commitment and will inside yourself.
Statistics are a good tool for giving people an idea of what’s happening in different fields, but they may not be the only way to think about trading. Some traders avoid the “average guess” by instead seeking ideas that are 10% (or higher) above market prices.
COMMON REASONS WHY DO FOREX TRADERS LOSE MONEY?
You don't begin operating on a human knee after watching a YouTube video of a doctor performing surgery. You don't start professional boxing because you think you'll make a lot of money. You don't skydive by yourself until you've been shown how to deploy your parachute.
When you think about it, the three instances above seem to make perfect sense, but many start trading and risking real money without completely understanding the game. Yes, trading is a game, and there are genuine losers and real winners. Many people believe they are traders because they buy and sell a few shares here and there, but when questioned why, they will offer a hazy comment about something they saw in the media or something they heard from their friends.
They may have examined a chart but are unable to speculate on why a market may have rebounded technically or broken down below support. Someone who has mastered the fundamentals of trading, on the other hand, understands the significance of developing a trading strategy, how to analyse a chart, and comprehend the exact reasons why they are buying or selling, as well as the exact percentage possibility of that transaction being successful. Moving beyond the fundamentals, that person comes to appreciate the significance of using money management techniques and how to maximise profits while keeping losses to a minimum.
THINK TRADING IS A QUICK WAY TO MAKE MONEY
People who are willing to tolerate a higher level of risk are drawn to trading because of its nature. These folks are typically risk takers with a proclivity to endure in other aspects of their lives. Regrettably, tenacity in trading can be disastrous to a beginner trader's capital. While it is possible to become wealthy quickly through trading, this is not the norm. Most people who become wealthy quickly did so through a lucky trade in a long-term bull or bear market and continued to increase their position.
That being said, you don't need $100,000 in your trading account to get started, but starting with less than $1000 makes it nearly impossible to create enough money to live off of. Don't be disheartened if you don't have enough money to start. Being a successful trader and being able to demonstrate it is all that is required. In reality, we know some prop trading organisations that only want you to succeed in a demo trading account before engaging you to trade their money. Consider this: if you can demonstrate that you routinely make profitable trades, reduce your losses, and use expert money management procedures, what else do you need to demonstrate?
HUMAN BEINGS ARE BUILT TO LOSE IN TRADING.
If you've been trading for a while or are just getting started, you've probably heard the phrase "psychology" thrown around a lot. It's amazing how most individuals disregard that subject in their new trading book and pass over that segment in the podcast series, despite the fact that it's the most overlooked and vital aspect of trading. When people lose, they feel a lot more than when they win.
Consider the casino: if you walk into a casino with $100 and lose $50, then immediately make $50 and walk out with $100, you still have $100 in your pocket. What would you be thinking at the time? The majority of individuals are unconcerned. They just doubled their money from $50 to $100, but they consider it a win from the time they went into the casino. Now, say another person merely loses $100 and walks away. That individual has effectively lost $100. The individual who loses $100 feels substantially more than the person who goes away with $100. We're not talking about whether you're feeling happy or unpleasant; rather, we're talking about how "intense" the experience is. In short, individuals despise losing far more than they enjoy winning. Losing is a terrible sensation, and individuals will instinctively try to avoid it if they can, even if it means putting themselves in more danger. What does all of this mean in terms of trading?
Some people will be unlucky enough to win their first few trades after learning a little about trading and even putting a few deals. We say "unfortunate" because this causes people to believe that trading is simple and they begin calculating how much money they will make at the end of the year if they simply maintain their efforts.
They begin to believe they can predict where the market will go, and occasionally their successful trades reinforce this newfound confidence. Something will happen in the market at some time, and they will feel with full certainty that they know where the market will move next. They take a transaction that is substantially larger than their regular trade size because of their level of confidence. This trade may initially go in their favour, but it will frequently retrace against them because the transaction is so much greater than typical, and the negative position they see in front of them makes them apprehensive and causes tension.
If the market continues to move against them, they may decide to re-enter the market, believing that the market is offering them an even better entry. Sometimes the market may pull back, and the trader will exit their losing position with a zero loss, allowing them to escape a large loss for one more day.
At some point, the market frequently continues to move against them, exacerbating the extent of their losing position. A little loss at the start has now evolved into a significant drain on their trading account; as the transaction approaches their protective stop-loss, they believe the market can no longer move against them and choose to move their protective stop to allow the market more breathing room. At some point, and each trader is different, the trader will move the stop loss so far away that if the market goes against them by that amount, they will lose the entire balance of their account; this one trade is often referred to as the "game ender" and is the cause of so many accounts blowing up.
This entire process is motivated by the fact that humans despise losing and despise being wrong. This arrogant issue in trading must be addressed promptly, and a new thought process must be devised.
The best losers are frequently the finest traders. New traders frequently have a limited view of the market since they monitor their trades on a daily or even hourly basis, and they make judgments based on short-term market movement. This leads to overtrading as people chase markets in an attempt to recoup prior losses, increasing the size of their trades in the process. Another typical mistake that both new and experienced traders make is exiting winning trades too soon and allowing their losers to get larger.
In some circumstances, many are content with a $500 victory and leaving a $1000 loss open in the belief that their transaction will turn around; however, statistics show that this is not the case. That's like to playing heads or tails and agreeing to receive $100 if heads is flipped and $200 if tails is flipped — would you play that game ten times in a row knowing the odds are 50/50?
10 MOST COMMON FOREX TRADING MISTAKES
As previously stated, humans are not born with the ability to trade. Mistakes in the financial market are prevalent, and they frequently lead to the same trading mistakes. On a frequent basis, new traders make these trading blunders. People must be aware of these mistakes if they are to be successful in forex trading. Everyone makes mistakes, especially in trading, but understanding the logic behind these blunders can provide the trader with insights that will allow them to profit from the mistakes of others. Let's take a look at the top ten most common forex trading blunders.
TRADING WITHOUT A STRATEGY
Frequent haphazard trading will result in failure. Traders who do not have a trading plan tend to be haphazard in their approach since they do not have consistency in how they place their transactions. A proper trading plan has particular rules and guidelines that explain when to enter each trade as well as when to exit each trade.
Trading is not designed to be exciting since excitement implies randomness, and randomness suggests guessing or gambling. A trading strategy is simply something that has been tested; it includes data that will tell you what your chances of success are on each transaction, and the trading system has been back tested and should have a decent chance of making you successful.
EXERCISE TOO MUCH LEVERAGE
Many inexperienced traders feel that higher leverage equals more money. This is completely false. Indeed, for many beginning traders, increased leverage often leads to an earlier account blow up. In actuality, traders should only put 1-2 percent of their trading money at risk per deal.
A leverage of 20:1 or 5% is frequently more than enough for most professional traders, but most brokers will give 500:1 (0.20 percent) leverage to allow traders to take larger transactions. By placing larger transactions, the broker benefits from increased spread revenue and commissions paid, benefiting the broker rather than the trader.
CHOOSING THE WRONG TIME INTERVAL
Each trading strategy should be based on a time interval. Scalpers trade on shorter time frames, while position traders trade on longer time frames. Prior to making trades, it is critical to keep the greater trend in mind, since the probability of success increases considerably when a trader initiates a trade in the direction of the larger trend.
Many forex traders will place transactions in unknown marketplaces at random. Some traders, for example, will place a position on GBPUSD in the same way they would on AUDUSD. While the rationale for entering the trade may be based on strong technical analysis, the position size should be changed based on the market's typical actual range. In short, those two markets do not move in tandem on any time scale. In general, the GBPUSD is substantially more volatile than the AUDUSD, and position sizes should be lowered to keep the amount risked stable. Without adequate analysis or a methodical approach, not knowing the market you're trading and reacting to media or erroneous advise should be avoided.
MISAPPLYING THE RELATIONSHIP BETWEEN RISK AND REWARD
Returning to our previous scenario, would you play heads or tails if you had to pay $200 every time tails was flipped and earned $100 every time heads was flipped?
Let's put this in writing so it's clear. If you flip a coin ten times and get five tails and five heads, you will collect $500 from the heads and pay $1000 from the tails, resulting in a $500 loss. If you are willing to accept a $500 loss in a trade in the hopes of turning it around and exiting with a $0 loss, you are making this error and require assistance in understanding risk management.
LOGIC VS. EMOTION
It's nearly impossible to avoid trading with emotion if you don't have a trading plan. As previously indicated, if you trade primarily on emotion, you are inclined to raise the size of your positions following a string of losing trades. These activities will finally result in the loss of the entire account. Furthermore, trading on emotion rather than logic makes calculating your projected profit per deal virtually hard because everything you do is random.
SIZES OF RANDOM TRADE
Every trading technique considers the magnitude of your trade. Most traders take outrageous positions in comparison to the size of their trading account, all in the name of chasing the get rich quick fantasy. As previously noted, the dangers associated with these huge investments have the ability to wipe out whole account balances.
For instance, if you deposit $20,000 in your trading account, you should not risk more than 2% of your whole account balance per deal. If I trade gold, for example, I should not lose more than $400 on that trade, which represents 2% of my overall account. Hopefully, by investing $400, I may make a profit of $800, representing a risk-to-reward ratio of 1:2 = good approach, as mentioned in the risk-to-reward section.
RANDOM MARKET TRADING
Only a few marketplaces are traded by professional dealers. There are thousands of things to trade, but the pros only trade a few of them. Why? They stick to a handful because they know those markets very well and are in sync with them. Some will only trade equities, some will only trade FX, while yet others will hunt for lucrative possibilities in the cryptocurrency market.
When you truly understand something, the likelihood of you choosing a winning position on it improves, just as it does with everything else in life.
NOT LEARNING FROM PRIOR WORK AND REVIEWING
This is a mistake that many experienced traders continue to make because it demands more work. The advantages of evaluating previous deals are enormous. Nothing teaches you more than losing money. Reviewing previous losers allows us to truly learn from our mistakes. The world's finest traders keep a trading log of every trade they make, as well as notes on why they made those trades. This procedure keeps them honest and allows them to carry out their trading strategy flawlessly.
SELECTING A BROKER
How do you choose the best broker? In most cases, the broker will be a publicly traded corporation that is regulated in a first-world country. Be aware of brokers who charge very little to take trades - they must make money somewhere.... There are numerous websites that go into detail about each broker and compare and contrast them for your benefit.
The trading platform is also an important factor to consider. Many brokers have their own unique trading platforms with complex trading tools, as well as the well-known MT4 platform. When choosing a broker, safety and credibility are the most important factors to consider, followed by cost.
SUMMARY OF COMMON FOREX TRADING ERRORS
In short, becoming an educated trader is the first step toward becoming a successful trader. You're already halfway there by reading this article. The practise comes after the education. Dealing with your human self and understanding how to handle your emotions when trading comes after the practise. You can choose the finest broker for you once you've built a trading strategy that fits your personality and mastered your trading emotions.
STATISTICS OF FOREX TRADING PERFORMANCE
Do you want to know how to recognise the difference between a real trader and a phoney trader? Inquire about their greatest drawdown in the previous six months. If they don't provide you a suitable answer, inquire about their trade expectancy. If they disappoint you again with an inadequate response, you may safely dismiss them as a successful trader and place them among the traders who are likely trying to sell you someone else's trading strategy. Trading data, often known as "performance statistics," allow you to understand what is working, what isn't, and what needs to be improved. At the very least, you should understand the following statistics:
How much money did you make after expenses, as in business? That is the amount of money you have left over after expenses. Take your total revenue and deduct your expenses and costs to get your net profit.
This is quite crucial. How frequently do you win? If I win four out of ten deals, my win percentage is 40%.
The loss percentage, like the win percentage, is important. If I lose six out of ten trades, my loss percentage is 60%.
THE MOST SUCCESSFUL TRADE
Your most profitable trade should be excluded from your "average win" data. You don't have to remove this significant win, but if it is very large in comparison to your previous wins, removing it will provide a more relevant look at your total statistics.
THE MOST SUCCESSIVELY LOSING TRADE
In the same way that your biggest winning transaction should be excluded from your "average loss" calculation, your biggest losing deal should be excluded as well.
WINNINGS ON AVERAGE PER TRADE
The average gain per winning trade is derived by dividing the total gain from all of your winning deals by the number of winning trades. Essentially, this answers the question, "How much do you win on average on your winning trades?"
TRADE LOSSES ON AVERAGE
As stated previously, the average loss per losing transaction is calculated by dividing your total loss from all losing trades by the total number of losing deals. Ideally, your average loss should be less than your average win. When this occurs, you might lose more often than you win while still making a profit in trading - the pros understand this better than anybody else!
RATIO OF PAYOFF
Once you've determined your average win and loss per transaction, you may compute the payoff ratio per deal. This is the difference between your average winning deal and your average losing trade. If your payback ratio is $180, you can expect to make $180 every time you initiate a trade.
HOLDING TIME ON AVERAGE PER TRADE
Often, the longer a deal is kept, the higher the profits. You may be able to identify a pattern and change your trading technique by examining the length of time you hold each deal.
LONG TRADING PROFIT/LOSS IN COMPARISON TO THE PROFIT/LOSS OF SHORT TRADES
Bear markets tend to decline swiftly, whereas bull markets tend to rise slowly. You may be able to determine if your strategy performs better going long or better going short by examining your transactions based on direction.
STREAK OF LOSSES CONSECUTIVELY
Although heads or tails is a 50/50 game, it is conceivable to flip heads ten times in a row, just as it is possible to take ten losing trades in a row. You must consider the worst-case situation. While a profitable strategy is one that has 99 losses in a row before seeing one victory, the trader is unlikely to stick to the game plan and will likely lose too much money before seeing a profit.
DRAW DOWN MAXIMUM
The maximum draw down is the worst phase of your trading method, similar to the losing streak statistic above. If you start with $10,000 in your account and end the month with $11,000, you will have made $1000, or a 10% return, which is fantastic. However, if my trading account had dropped below $5000 that month before bouncing back and rising to $11,000, I would have suffered a 50% draw down, which would have been far too risky of a trading technique.
THE MOST IMPORTANT STATISTIC IS EXPECTANCY.
To put it simply, expectation is the average amount you may expect to win or lose per dollar at risk. Your expectation can be calculated by multiplying the loss percentage by the average loss and subtracting the result from the average win multiplied by the average win. This is, without a question, the most significant statistic to consider when evaluating different trading strategies.
DAILY TRADING JOURNAL
We mentioned this in the last section, but keeping track of your transactions is critical, and all experts do it. You should keep a record of all your transactions. Often, inexperienced traders believe that this would need a significant amount of labour, but creating a simple excel sheet will handle the most of the job for you. Also, if you believe this will take too much time, you are probably making too many deals. If you just trade 3-5 times per week, the labour involved here is little, and you may be quite detailed with your trading record. The primary goal of gathering and calculating these information should be to identify strategies to enhance your expectation while also isolating those "poor" deals so you can learn from your mistakes. What do you do with this information after keeping note of your transactions in a diary and getting your trade statement through your trading platform? It's fairly simple:
THE DEVELOPMENT OF A FOREX TRADING PLAN
To begin, you must determine your trade frequency. If you are a scalper, you are probably interested in trading sessions such as the European Open or the New York Open. If you trade 1 or 2 times per day, you'll most likely be working with a 24 hour plan; if you trade 1-4 times a week, your plan may be 1 week. It's doubtful that you'll be looking at 1 month because it's more of an investor's time horizon than an active trader's. After you've determined what sort of trader you are, the following step is to set a limit or boundary for your trading plan. A decent rule of thumb is to divide the overall number of successful transactions by the total number of deals in one day and multiply that number by 1.20. For example, if you average 20 trades per day and only win six of them, you should reduce your trading frequency to seven transactions per day. This is computed by multiplying your winning trades by 1.20, and it is an accepted and acknowledged way for calculating the maximum number of transactions that should be placed in a single day.
TRADING COSTS ARE LOWER WHEN THERE ARE FEWER OPPORTUNITIES.
People dislike hearing the phrase "fewer opportunities" in any situation, but this should not be interpreted negatively when it comes to trading. Because every trading opportunity can result in a gain or a loss, we must be extremely discriminating when deciding whether or not to trade an opportunity. When you're working with a time constraint, you tend to be more cautious about the number of deals you make in a particular day. You will examine each deal in greater detail and be more thorough in your analysis.
BORING TRADING IS GOOD TRADING – MAKING A FOREX TRADING PLAN
Limiting the quantity of deals you can make in any particular session also limits the number of emotional trades you can make because they don't fit into your plan. Emotional transactions, it is thought, are frequently the major reason most traders lose money in general. Any approach that eliminates the likelihood of those calamitous deals should be implemented with vigilance.
ENTRY SIGNALS - WHEN TO ENTER A TRADE
In order to avoid missing any more upside, new traders open a chart, swiftly analyse the market, and enter immediately. The fear of missing out on an opportunity is what motivates the rookie to act in this manner, which is entirely natural human behaviour. The challenge is to recognise that the market will present several possibilities, and you should never enter a transaction without confirmation. Will you enter if the prior high is broken? Will you enter 5 pips higher than the barrier in the higher time frames? Will you come in when the inside bar closes? Every forex trading strategy should be objectively defined. The idea is to eliminate as much subjectivity as possible in order to prevent introducing judgement and consequently emotions into the deal.
When to quit a transaction is just as crucial as when to enter it. Will you exit half of your trade at the current ATR and the other half at the 100 percent Fibonacci level? Most individuals can forecast where a market will go next with some degree of accuracy. That is not the challenge in trading; the most difficult problem to tackle is when to grab your gains and when to realise you made a terrible judgement and cut your losses. Entry and exit signals will help you stay objective while also accumulating statistics during back testing since the objective nature of your strategy can be examined without putting any cash at risk - that's how the experts do it.
TRADE ON A DEMO ACCOUNT
A trader's best buddy is a demo account. Seriously, you should devote a significant amount of time to your selected demo account, trading, and back testing. Why would you establish an actual trading account if you can't regularly be profitable with a demo account?
WRAPPING EVERYTHING TOGETHER
Traders lose money because they do not devote the necessary time to learning the trade. Most novice traders are enthralled by the thought of lying on a beach and trading for millions of dollars, so they don't bother learning from actual professionals and instead enrol in pricey trading classes.