Why Do Traders Lose Money?
Despite using the most intricate charts, automated trading tools, the range of indicators and plenty of sources for fundamental analysis, forex traders do lose money from time-to-time. Even the most legendary traders have all suffered heavy blows in the market at some point or other. Many experts say that losing is the systematic requirement of the market.
All sorts of factors come into play here; poor decision making, bad trade terminals, peer pressure, psychological aspects, and even superstitions. Here are a few common reasons for losing trades.
Inadequate Risk Management
A highly skilled trader could be wiped out by poor risk management tactics. Traders who do not prioritize protecting their profits tend to incur losses in the long-run. If the capital keeps getting depleted, profit-making abilities will also be affected. Stop-loss and take-profit levels can be used at the right points while executing a trade and be moved when sufficient gains have been achieved. Lot sizes should also be kept in mind, and if they are reasonable compared to the account capital, that’s a good thing.
Risk management is essential in any market; volatile or not.
Emotions have no place in trading, but they can come into play sometimes. The quest for gains can make a person greedy, jealous, fearful or over-confident. Many traders continue to hold on to their positions for a long time, thinking that they will get out before a currency pair turns. If they don’t get on in time, however, traders can lose the profit that they might have earned so far. Currencies move every day and therefore trying to grab every last pip can be risky.
Another emotion to tackle is fear. Many traders have suffered a string of losses and subsequently exited positions much before they could achieve gains. In the process, they have lost good opportunities. The other end of this spectrum is occupied by traders who think that they know it all. Consecutive wins can make a person overconfident. Mistakes happen, and it’s good to own them. Traders who don’t learn from their mistakes end up suffering failures.
Trading Tops or Bottoms
New traders tend to add on to wrong trades. They concentrate on turning points in currencies and place trades, in hopes that the trend will become at some point. This results in exposing trades to risks and negative account balances. Picking a bottom in a downtrend is not always a right decision; similarly, while trading tops, experienced traders will often do so when the market corrects upwards. Traders often think of beating the market to prove a point. This can result in aggressive decision making which can be a recipe for disaster.
The profession of trading demands skills that have to be developed over years of hard work and learning. Consider keeping a trade journal to note every move in the market and their results. This will help you to keep track of your decisions. You might be able to learn from bad ones and grow as a trader.