During my time spent as both an analyst and a trader I have come to understand what the hardest thing to do in trading is and why it is a huge number of traders that lose their money on the Forex market.
Let us start by understanding what the Forex Market is. The name itself Forex comes from the Foreign Exchanges. It represents all the exchanges between currency rates from all over the world. It is done between banks and clients, between exchange houses and retailers, even the exchanges between friends are considered to be on the FX market. Knowing this we can now understand why it is difficult to register all the transactions and have the volumes like we have for stocks or commodities.
The currency exchanged market became bigger and bigger especially when this kind of transaction could be made online fast and at very low costs. Volumes went on new highs so there was plenty liquidity for the orders to be filled. Leverage was added and the market became even bigger. The only problem is that more and more traders are losing their money.
Many reasons were brought up for why retailers especially lose their money. Some of them are:
- Because they are scalpers (traders who make many trades on high volume – see our Scalping Guide);
- Because they do intraday trading (trades within a day);
- Because they don’t know analysis and don’t have a strategy;
- Because their account is too small;
- Because the broker worked against him;
And this list can be continued, but I don’t think that all of these are relevant in answering the questions “Why do traders lose?”
Two down, what next?
While researching for my analysis carrier I have found that there are a lot of trading strategies that can work because they have very good accuracy. Different technical indicators combination, adding fundamental analysis, or trading based on market sentiment could result in a profitable trading strategy on the Forex Market. Discovering this I became even more curios why people lose their money.
After a while I started trading, believing that I have knowledge about the market, that I understand the processes and the risks. Guess what? I have managed to empty two accounts. It was unbelievable, because I had learned a lot about the FX market and still lost money. What was my problem?
I had to choose, leave it or try to find the reason that made me lose money. I got back to studying, reading, and demo trading for quite some time. After 6 months I got back to trading real money with some new and very good trading strategies based on technical analysis and this time I actually managed to keep myself at breakeven for a month or so. It was good but not enough. I knew I had to gain more experience so I continued and became more confident and turned the balance in my favor.
What had changed?
When I got back to my studying I have changed my focus from the theory to the emotions that overwhelmed me while I was trading. This is actually the biggest problem for a trader. Not knowing what will happen when a trade is placed everything changes. Fear and greed makes their place into anyone’s mind and manage to create illusions and expectations which eventually paves the way to losing money.
Reviewing my past trades I also tried to understand what my emotions were and why were they there. As a technical analyst, I then, as well as now, had very good accuracy at my forecasting analysis. This applied also for the analysis did for trading. But still my accounts vanished. The reason for this was that I first made my analysis, but changed my actions while trading. Emotions made me change my first scenario and leaded me to loss.
I believe that the evolution of a trader can be split, as any other job, in two parts. The first one is the learning part and the second is the making money while trading as a day to day job. While the second part it is pretty easy as long as one can get there, the first one is tricky, believe me, I’ve been there.
1) History of Trading – First step in learning would be to gather some materials about trading in general. This way you will understand what trading is, from where it started and see if it interests you.
2) Forex Market – This is one of my favorite market to trade on for many reasons, you can read about it in our past articles. If you would like to trade on it you should be prepared. Read articles, definitions, books on the forex market so you can understand what it is, how it moves and why you have chosen it.
3) Risks and Benefits – Acknowledge the risks and the benefits that you could have while trading on the FX Market. There are plenty of articles written over this matter.
4) Technical and Fundamental Analysis – Be sure to learn something about forecasting. For this you should read about Technical Analysis and put your basics also for the Fundamental Analysis, this way you can get to the next step.
5) Find a Trading Strategy – As I said there are lot of strategies that work. You can find some in our Forex Strategies section, at other traders or you can develop it yourself. Be sure to put it into a trading system and practice it on a demo account.
6) Demo Trading – For a while you will need to do this. It will define your style, your strategy and you can learn more about the instrument you are trading on. In my opinion it should be mandatory for every novice trader.
7) Real Money Trading – Most of the traders stop at point 6, believing that if they have a good system it will work also as well on the real account as it did on the demo account. As long as you are not a robot without feelings it will not be the same. I recommend you to invest a sum of money that you can afford to lose. This way you will not be tensed while trading, but you will feel how it feels to trade real money. It is in my opinion an investment that each trader should do for his education, and also an important step in his learning path.
It might seem a long list, but every step there is important if you want to be successful in trading and lose as less money as possible.
Don’t be greedy!
From this domain a lot of money can be earned, but also can be lost. Nowadays there are a lot of information on the internet and everyone is tempted to learn for themselves without paying for books or mentoring. It isn’t something bad, but everyone should know that at some point they will have to invest some money in their education, so that they will become profitable in time. The smartest way to invest is by trading real money in the learning process.