How Do You Lose Money in Forex Trading
Last Updated: Aug 5, 2020
What’s stopping a forex trader from becoming a billionaire? The answer lies in the question itself. Some people might not realize this but sometimes traders often get in their way and botch things up.
From not managing risk properly to the carelessness of not following a proper trading plan, there are endless ways in which you can lose money in trading forex.
The foreign exchange market where everything related to forex takes place is immense and highly volatile.
Losing money while trading forex can also be a major dampener which forces many beginners to quit trading entirely. Some of those dampeners are:
Bad Risk Management Skills
Improperly managing risk or choosing to ignore important risk factors such as market fluidity while trading can lead to a trader losing their money very quickly.
This is one of the reasons why trading platforms provide their customers with the option to stop losses to be put in place so that all trades are automatically exited once a certain amount of profit has been made from the trade.
A trader who is supposedly bad at managing risk would fail to the advantage of the various tools and indicators that are available on the market and keep their risks to a minimum.
A trader with good risk management skills will try his best to ensure that his capital doesn’t suffer any unnecessary withdrawals owing to losses and other factors.
One thing to keep in mind with stop losses is that they might end up robbing you of the chance to make more profit as they automatically exit a trade once they reach the set amount.
If that particular currency pair in the case of forex continues to go upwards after your stop-loss exits it may prove to be a waste for you as you will not be able to catch future profits on that pair.
There’s an old saying which says that too much of anything can be harmful and that cannot be any further from the truth.
A good percentage of beginner traders fail at what they do and lose money because they don’t know when to stop.
This is why doing your homework is necessary for someone new to forex trading as knowing behind the workings of the entire foreign exchange market will help the trader know when to jump in and when to jump out.
Addiction & Thrill Seeking
This one is worse than overtrading as addicts trade for the thrill rather than to make money. This can prove to be a huge disaster for thrill-seekers as they are more prone to take riskier decisions when it comes while trading currencies.
The high paced and volatile nature of the foreign exchange market can be very adventurous for those who are into cheap thrills.
As exciting as all of that sounds, trading forex irrationally can lead to the trader incurring heavy losses as forex has the maximum amount of leverage available.
Legendary forex trader George Soros has even claimed that the act of trading currencies has always been boring for him. He even said that if a trader is having too much fun, then he’s probably not making too much money.
Not Sticking To The Plan
The best way to avoid disastrous situations is to lay out a plan and stick to it. Deviating from the plan leaves you in uncharted territory which is never a good thing for someone on the foreign exchange market.
Traders who do not take the foreign exchange seriously almost always end up losing their investments due to poor planning and decisions.
The best way to proceed is to treat forex as a business. That will mentally prepare you to take it more seriously and invest more time into researching ways that will keep your business afloat.
The basics of a trading plan are the entry and exit points, proper risk management and expectations as well as ratios.
Choose what style of trading fits you better and study the various strategies that go well with them and implement them in your way.
Inability To Adapt
The foreign exchange market is a big place that is always in a state of flux which means that there is very little certainty there.
A single trading strategy is never going to be enough for anyone to survive in the treacherous world of currency trading.
Forex traders who lose money trading currency pairs are often cursed with the inability to adapt to the market. Once plan A fails, you’re supposed to move on to plan B and carry on.
Having multiple backup plans in case one fails is very important for a forex trader.
However, not all is doom and gloom when it comes to volatility and forex. Many traders have been known to take advantage of the volatility of the fx market to huge profits.
Many traders even layout strategies and trading tactics that have been designed to only work during adverse volatile conditions of the market.
Having Unrealistic Expectations
When you ask why inexperienced forex traders fail and lose money, unrealistic expectations are usually the answer.
Keeping your expectations at a realistic level when trading currencies is one of the most important things for a forex trader with no prior experience in financial markets.
There are many reasons for someone to aim a little too high while trading forex for the first time. For example, most traders fall for the false advertisements of various online ad campaigns related to fx.
Other times it is just the simple naivety on part of the trader.
The foreign exchange is indeed a very attractive marketplace where anyone has the chance to make their dreams come true.
All you have to do is treat it seriously as a business and care for it. Know when to invest, enter, and exit and the only way of perfecting those skills is to practice.
Do proper research, lay down the groundwork, formulate multiple trading strategies, and revise them until you are confident that they’ll work out.