Statistics will tell you that 80% of forex traders leave, disappointed, after the first 6 months of trading.
You read it and think, ‘I don’t want to become a part of this statistic.’ There’s every chance that you will not that is, if you trade wisely and have a solid plan backing you.
In this piece we talk about some technical and psychological reasons why traders fail or lose money.
We have put together a list of the 5 most common reasons. Have a look if you’re interested.
1 Trading without a solid goal or plan
If your plan for the average day is to just start trading and then see where the day takes you, you’re doing it wrong. Your overall income will not be a profitable one.
Without a plan you will make inconsistent amounts of profit and not have a set risk management strategy (and hence a stop loss) to cut losses.
So if you make a small profit one day and a big loss the other day and then an average sized profit and then a loss…altogether you will notice your account is definitely not growing.
No one makes a lot of money by chance in the forex market. Since losses are an inevitable part of trading, there has to be a plan with statistics and numbers all calculated to make sure the account grows.
2 Not keeping a calculated target
This is an offshoot of the above point. To be successful in trading, the expert trader will have a number in mind.
If your strategy is such that you make bigger profits when you win then even a win rate of 45% will do too. But keep a journal and record these things.
Keeping records and calculating all this is necessary because you have to treat forex like a business. Businesses always keep their records and manage finances. This is basically money management.
The main benefit it provides is by helping the trader identify the patterns to be able to make adjustments as required.
3 Trading against the trend
In forex, bulls and bears are always working on dragging the market in their favor. And from their efforts results a trend. The best thing to do when there’s a clear one way trend is to trade in its direction.
Going against the current, you will most likely drown.
If you were hoping for a bearish market but it’s bullish, you alone will not be able to bring it down. A lot of people fall in this trap and try to become part of the resistance the trend is facing. But the truth is that the trend is stronger than the resistance and so stubbornness against it will mean loss.
Don’t make it a personal battle that you have to win. A lot of people end up doing this and trying to fight or take revenge on the market. The market doesn’t know and it doesn’t care. Your safest bet is being logical and not emotional.
4 Entering a trend at the wrong time
While trading the trend is highly recommended, there is a right and wrong time for this.
The right time would be near support (so you can make the most profit off of the move) and the wrong time would be near resistance (because now the price will move in the other direction).
One way to know when this is about to happen is to compare it to moving averages. If the trend is way above the moving average, don’t buy at the top because sure enough it will come down from there. Buy when it’s overlapping with the moving average or near it so that you can make the most off of the move that’s about to come.
There is also the concept of ‘overbought’ and ‘oversold’. The market is overbought when the trend was upwards and so bulls kept buying and so the price kept moving up. Remember that the main purpose of that buying is to sell it at a higher price. However, after a certain rate, no one will be willing to buy it from you at that high a price. And so it means that the pair is now overbought and the market will move down as a result.
Oversold market is the same thing happening in a bearish trend. The bears sold so much of that pair that now the market is reaching a major low and is about to reverse.
So don’t participate at these levels because a reversal will happen soon, and consequently if you’ve bought higher, you will be forced to sell it lower.
5 Trading desperately
More often than not, trading desperately will cause a huge amount of losses to an already struggling trader. It is a cyclical pattern in which losses cause desperation and then that desperation will result in more losses.
The main cause for this is trading with emotions. You should not be jumping at any trade that is available. Choose the ones you want to participate in and don’t make these decisions after you’ve had a loss or after a big win.
If there’s the need to make up for a big loss at the back of your head, it is very likely that you will make this decision with an unhealthy amount of hopefulness or fear. Both of these things do not inspire reasonability.
Also, just as you set a standard for your Stop Loss or your profits, you should know what kind of trades you’re looking for and only go for those.
These are some common reasons that go unnoticed when a person is starting out their trading career.
When the person is going through a bad trading spell, there could be any number of factors at work that are causing it. Identifying them and streamlining the adjustments that need to be made can be very overwhelming.
Hopefully, this brief list will help you figure out where you’re lagging in you strategy and plan.