The forex market has very many investors, but only a couple of them are truly successful. Most forex traders fail for the same reasons that affect investors in other asset classes. Various websites estimate that about 70% to 80% of traders lose money and end up quitting.
Using borrowed capital to boost potential returns from investments and the small margins available when trading forex denies traders the chance to make several low-risk mistakes.
Some factors specific to trading forex can cause some traders to expect more returns from their investments than what the market can consistently offer. What’s more, these factors can even make them shoulder more risk than they would in other markets.
Let’s look at some of the most common reasons why forex traders fail. Then, in the long run, you will know what to avoid and maybe make it into that elusive bracket of successful traders.
Some of The Reasons Why Forex Traders Fail Include:
Lack of A Trading Plan
Whether you’re trading in the forex market or any other market, the first step to success is creating a trading plan and following it. “Failing to plan is planning to fail” is a saying that applies to any kind of trading.
Successful traders work within a documented plan that lays down the expected ROI (return on investment) and includes risk management rules. In addition, following a trading plan can help you to avoid some of the common trading risks. Therefore, if you don’t have a plan, you’re selling yourself short with regard to what you can accomplish in the forex market.
Lack of Trading Discipline
One of the biggest errors you can make as a trader is allowing emotions to impact your trading decisions. Being a successful trader means having a few big wins and many smaller losses.
When you suffer several significant consecutive losses, it can be challenging to handle emotionally, thereby testing your confidence and patience. As a result, you can give into greed and fear, causing your losing trades to run out of control. Conquering emotions is done by trading within a well-formulated trading plan that helps you maintain trading discipline.
Trial and Error
Undoubtedly, the most expensive way to gain forex trading knowledge is through trial and error. Discovering the perfect trading tactics by learning from mistakes is not an effective technique to trade in any market.
The forex market is substantially different from the equity market; this means the probability of novice traders sustaining account-crippling losses is higher. As a result, the most effective way to become a successful trader is to seek help from experienced and successful traders.
You can do this through a mentor relationship with traders with outstanding trading track records or formal trading education. In addition, you can shadow the traders as they go about their trading activities and get to see what they do.
Forex trading is not a get-rich-quick structure which means becoming a proficient trader who can accrue profits is not a sprint; it’s a marathon. Instead, trading success necessitates recurrent efforts to master all the strategies involved.
Trying to force the market to generate abnormal yields usually results in traders risking more capital than justified by the potential returns.
Abandoning trade discipline to gamble on unrealistic returns means abandoning risk management rules intended to protect you from losing all your money.
Failure to Manage Risk
As a trader, you ought to put as much focus on risk management as you do on formulating a trading plan. But, unfortunately, some naïve traders will trade without protection and refrain from using stop losses and similar guards in fear of being locked out too early.
At any given time, a prosperous trader knows precisely how much of their venture capital is at risk and is satisfied that it’s suitable compared to the projected returns. As your trading account grows, capital preservation becomes more vital.
Diversifying currency pairs and trading strategies in concert with the suitable position size can protect your trading account from crippling losses.
All in all, most of the factors that make forex traders fail are the same ones that affect investors in other asset classes. So perhaps the best way to avoid some of these issues is to cultivate a relationship with other traders who have outstanding track records. They will teach you trading discipline, including the risk and money management.