6 Classic Reasons why you are losing money trading forex

Apr 15, 4:10 pm
losing money trading forex

It is often said that over 95% of traders lose money trading forex. While it is hard to figure out where this statistic has come from, the fact remains that most traders end up losing money when it comes to trading forex. If you are one of them, chances are that you are probably doing one of all of these 6 classic mistakes outlined in this article. If you are serious about trading and want to improve your results, avoid these mistakes in order to take your trading to the next level.

1. The Holy Grail

So you came across this very hot thread on a forum, or on a forex website, that talks about a trading system that promises you some fat profits. Great!! So you apply this system and you start trading. Week 1, you see some great results. Awesome! Week 2, your trading becomes a bit mediocre, but you give it a go. Week 3, you end up giving back most, if not all your profits you made, and even worse, you end up losing some of your equity too.

Time to move on… The hunt for the Holy Grail continues (or, a better trading system or maybe a simpler trading system).

Month 3, you have tried about 4 or 5 trading systems and your bottom line equity is worse than when you started.

The Mistake: Most traders expect trading to be as simple as following the trading rules A, B and C. Fact is, trading is not that simple as it seems. And it is no wonder why traders start jumping from one system to another.

How to correct this mistake?

Spend a good deal of time understanding the trading system you are using. More importantly, take some time to research into the indicators that are used in the trading system. Understand what the indicator does in relation to price. Remove any unwanted or redundant indicators from the system.

Make a note of your trades. Start with focusing on the biggest winners and the biggest losers. Then, compare these two results and understand why the trade results were so different. Is it to do with the market conditions? Did some expected or unexpected news event turn the tide for you?

The fact is, moving from one trading system to another is not the solution, but rather understand the trading system in order to figure out what your charts are telling you.

2. Missing the Big Picture

Most traders often look at the charts in isolation and trade in a sort of mechanical way. So your trading system told you to go long on USDCAD, few hours later, the Canadian unemployment data is released and it was bullish for CAD. Your trade quickly turns around against your position. Or perhaps you forgot to look at that big weekly bearish engulfing candlestick. When you miss the big picture, chances are that you are trading with a tunnel vision and therefore it is quite possible that you could be trading on the wrong side of the market.

How to correct this?

Before you enter a trade, always find out what is happening on the higher time frames. Whether you trade the hourly or 4-hour charts, always check the weekly and daily charts and look for any clues these timeframes may be giving you. Chart patterns, candlestick patterns, trend lines, all of these help you to understand what the market is doing.

It is also in your best interests to check the daily economic calendar to spot any news events that could play havoc with your trade set ups. This ensures that you are able to better manage your risk.

3. Risk Management

Despite a whole lot of information available on risk management, most traders simply do not pay much attention to this aspect. For most, risk management is all about risking 1 or 2% of their equity on a trade. This is a very flawed approach and something traders should pay attention to.

How to correct this?

For example, if you notice a trade set up that is validated by the fundamentals as well as different technical analysis methods; do you still want to risk only 2% of your trade? Why not up the ante and go big when you find that the particular trade set up looks to offer a higher reward? Of course, that doesn’t mean one should simply scale up their trade sizes blindly, but also work on keeping the losses to the minimum.

4. Trading on impulse or emotions

Do you often find yourself jumping into or out of your trades based on impulse? Only to find price turn around you in most cases leaving you with a large hole in your equity pocket? Trading on impulse or emotions can be a dangerous game and often results in a quick depreciation of your trading balance. Very often, it takes just a few such trades to wipe out any profits you might have made over a period of a week or a month.

How to correct this?

Always have a reason to enter a trade and always exit a trade for a reason. Markets often chop around and end up confusing the trader. Therefore, it is important for a trader to work within a framework of their trading system. If you find yourself constantly taking impulsive or emotion based trades, then either turn off your trading terminal or have a reminder in the form of a note right next to your screen, if it helps.

5. Take responsibility for your trades

The trading world is filled to the brim with the next hotshot analyst trying to force their trading opinions onto you. If that’s not enough, most of the popular trading websites often carry articles that tend to influence your trading decision or bias. Such outside influences often tends to sway the weak-hearted or perhaps the less confident trader.

Also, during times of weakness, or when your account is down, you could end up falling prey to these ‘trade ideas’ in hopes that it could help put you back on track. In most cases, these desperate outside trade ideas end up doing more damage to your equity and your trading morale as well.

How to correct this?

Always tell/remind yourself that you are responsible for your trading. Trade ideas might seem tempting, but if you do not know how to manage the trade. If you find yourself falling prey to such trade ideas, then take them on a demo and follow the trade ideas for at least 3 months and then judge for yourself if these free trade set ups do indeed work for you or not.

6. Spend time managing your trades, not analyzing the charts

A good trader manages risk by trading price. A mediocre trader ends up analyzing and over analyzing their charts. Take a hop around various forums and the most common charts you find are those filled with tons of indicators, shabby trend lines that are often confusing.

Heard of keeping it simple? Well, it works with forex markets as well. If you find yourself trying to analyze and keep revisiting and tweaking your analysis, chances are that you aren’t focusing on the important aspect of trading, making money.

How to correct this?

If you are a trader who focuses too much on analysis, then chances are that either your trading priorities are mixed up or you are not too confident in your trading system. Once you gain confidence in your trading system or your analysis, you will find yourself able to manage trades and thus risks a lot better. Stops/Take profit levels, position size become a lot clearer to understand.

 

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