Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake.
Big data analysis, algorithmic trading, and retail trader sentiment.
We look through 43 million real trades to measure trader performance Majority of trades are successful and yet traders are losing Here is what we believe to be the number one mistake FX traders make.
W hy do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article , we look at the biggest mistake that forex traders make, and a way to trade appropriately .
Why Does the Average Forex Trader Lose Money?
The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult.
We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain.
Percent of All Trades Closed Out at a Gain and Loss per Currency Pair.
Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015.
The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time.
If traders were right more than half of the time, why did most lose money?
Average Profit/Loss per Winning and Losing Trades per Currency Pair.
Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015.
The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades .
Let’s use EUR/USD as an example. We see that EUR/USD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. Traders captured profits on 59% of all GBP/USD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades.
What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution.
Cut Losses, Let Profits Run – Why is this So Difficult to Do?
In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run.
When your trade goes against you, close it out . Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later.
If a trade is in your favor, let it run . It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains.
But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology.
A Simple Wager – Understanding Human Behavior Towards Winning and Losing.
What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?
50% chance to Win 1000.
50% chance to Win 0.
Expect to win $500 over time.
Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again.
50% chance to Lose 1000.
50% chance to Lose 0.
Expect to lose $500 over time.
In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time.
Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why?
Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory.
Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards.
The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains .
It feels “good enough” to make $450 versus $500 , but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around.
This doesn’t make any sense from a trading perspective—50 0 dollars lost are equivalent to 50 0 dollars gained; one is not worth more than the other. Why should we then act so differently?
Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure.
Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success.
Avoid the Common Pitfall.
Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely?
When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book.
Typically, this is called a “ reward/risk ratio ”. If you risk losing the same number of pips as you hope to gain, then your reward/risk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 reward/risk ratio.
If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades.
What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio . That way, if you are right only half the time, you will at least break even.
Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower reward/risk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher reward/risk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the reward/risk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series.
Stick to Your Plan: Use Stops and Limits.
Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning .
This will allow you to use the proper reward/risk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor).
Managing your risk in this way is a part of what many traders call “money management” . Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading.
Does Using 1:1 Reward to Risk Really Work?
Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it.
Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent.
T raders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference.
Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015.
Game Plan: What Strategy Can I Use?
Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher.
Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account.
The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away.
We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders.
*Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2014 to 3/31/2015.
View the next articles in the Traits of Successful Series:
The Traits of Successful Traders.
This article is a part of our Traits of Successful Traders series.
Over the past several months, The DailyFX Research team has been closely studying the trading trends of traders via a major FX broker. We have gone through an enormous number of statistics and anonymized trading records in order to answer one question: “What separates successful traders from unsuccessful traders?”. We have been using this unique resource to distill some of the “best practices” that successful traders follow, such as the best time of day, appropriate use of leverage, the best currency pairs, and more. Stay tuned for the next article in the Traits of Successful Traders Series.
Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.
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Reasons Why Forex Traders Lose Money.
A commonly known fact is that most forex traders fail. In fact, it is estimated that 96 percent of forex traders lose money and end up quitting. DailyFX found that many FX traders do better than that, but new traders still have a tough timing gaining ground in this market. To help you to be in that elusive 4 percent of winning traders, we have compiled a list of the most common reasons why forex traders lose money.
Starting Advice.
Do not try and beat the market!
The market is not something you beat, but something you understand and join when a trend is defined. At the same time, the market is something that can shake you out if you are trying to get too much from it with too little capital. Beating the market mindset often causes traders to trade against trends and overlords their account which is a sure recipe for disaster.
Low Start Up Capital.
Most currency traders start out looking for a way to get out of debt or to make easy money. It is common for forex marketing to encourage you to trade large lot sizes and trade highly leveraged to generate large returns on a small amount of initial capital. You must have some money to make some money. It is possible for you to generate outstanding returns on limited capital in the short term. However, with only a small amount of capital and outsized risk, you will find yourself being emotional with each swing of the market and jumping in and out and the worst times possible.
Solution: People that are beginners in forex trading should never trade with only a small amount of capital. This is a difficult problem to get around for someone that wants to start trading on a shoestring. $1000 is a reasonable amount to start off with if you trade very small (micro lots or smaller).
Otherwise, you are just setting yourself up for potential disaster.
Failure to Manage Risk.
Risk management is key to survival. You can be a very skilled trader and still be wiped out by poor risk management. Your number one job is not to make a profit, but rather to protect what you have. As your capital gets depleted, your ability to make a profit is lost.
Solution: Use stops and move them once you have a reasonable profit. Use lot sizes that are reasonable compared to your account capital. Most of all, if a trade no longer makes sense, get out of it.
Some traders feel that they need to squeeze every last pip out of a move. There is money to be made in the forex markets every day. Trying to grab every last pip before a currency pair turns can set you up to lose the profitable trade that you are trading.
Solution: It seems obvious, but don't be greedy. It is ok to shoot for a reasonable profit but there are plenty of pips to go around. Currencies move every day; there is no need to get that last pip. The next opportunity is just around the corner.
Indecisive Trading.
Sometimes you might find yourself suffering from trading remorse. This happens when a trade that you open isn't immediately profitable and you start saying to yourself that you picked the wrong direction.
Then you close your trade and reverse it, only to see the market go back in the initial direction that you chose.
Solution: Pick a direction and stick with it. All that switching back and forth will just make you lose little bits of your account at a time.
Trying to Pick Tops or Bottoms.
Many new traders try to pick turning points in currency pairs. They will place a trade on a pair, and as it keeps going in the wrong direction, they continue to add to their position being sure that it is about to turn around this time. If you trade this way, in the end, you end up with much more exposure than you planned and a terribly negative trade.
Solution: Trade with the trend. It is not worth the bragging rights to pick one bottom out of 10 attempts. If you think the trend is going to change, and you want to take a trade in the new possible direction, wait for a confirmed trend change.
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If you want to pick up the bottom, pick up the bottom in an uptrend, not in a downtrend. If you want to top, pick a top in a corrective move higher, not an uptrend in a downtrend. If you want to top, pick a top in a corrective move higher, not an uptrend.
Refusing to Be Wrong.
Some trades just don't work out. It is human nature to want to be right, but sometimes we just aren't. As a trader, sometimes you have just to be wrong and move on, instead of clinging to the idea of being right and ending up with a blown account.
Solution: It is a difficult thing to do, but sometimes you just have to admit that you made a mistake. Either you entered the trade for the wrong reasons, or it just didn't work out the way you planned it. Either way, the best thing to do is just admit the mistake, dump the trade, and move on to the next opportunity.
Buying a System.
There are many "forex trading systems" for sale on the internet. Some traders are out there looking for the ever elusive "100 percent accurate forex trading system". They keep buying systems and trying them until finally giving up deciding that there is no way to win.
Solution: Accept that there is no such thing as a free lunch. Winning at forex trading takes work just like anything else. Build your system and stop buying worthless systems on the internet.
How Do Forex Brokers Work?
Ever wondered how forex brokers work? How they make money? To answer these questions, you need to understand the different types of forex brokers and their various business models. Unlike humans, not all forex brokers are created equal. Some are much more competitive than others and some, are just outright scammers. Sadly it’s not always easy to tell the difference between the two, some of the oldest and most famous names in forex are notorious for shady and underhanded tactics. In this article we will discuss the various types of forex brokers and why it’s important to trade with a true ECN broker.
Market Makers and Spreads.
All forex brokers will tell you they make their money off the spread (the difference between the buy and sell price), however lots of brokers actually only derive a small portion of their income from spreads. How do they make money then you ask? Simple. By trading against their clients.
These brokers are known in the industry as market makers. The problem is, the vast majority of forex brokers actually operate in this manner. When you first start out trading you assume you are buying and selling from other participants in the market: if you make money, someone else is losing money and vice versa. This is true to a point, but often this ‘someone’ is a lot closer than you think … it’s your broker!
The vast majority of new traders lose money, that’s a fact. If they continued to trade and addressed shortcomings in their strategy and psychology, they would likely improve and end up becoming profitable, but many just aren’t up to the challenge and leave as losers. Market makers are not only fully aware of this, their entire business model revolves around it. Market makers make money when their clients lose, simple as that. This is a glaring conflict of interest, rather than the broker making money when the client wins and continues to trade, they actually have a vested interest in their client losing!
The market maker game is to recruit new traders by the hundreds, offer some free, substandard education, or a bonus. Even if the new trader is lucky to begin with and makes money off their bonus, they will likely then make a much larger deposit which they eventually lose.
Because of the inherent conflict interest involved in making a market, some (though not all) market makers have been known to engage in some extremely nefarious tactics. There are horror stories of unexplainable spikes, spread widening, stop hunting and even refused withdrawals and closed accounts!
STP Forex Brokers.
STP is short for Straight-through Processing, STP brokers essentially operate on the model you thought your market making broker used: they make their money off the spread and you are actually trading against other participants in the market. STP brokers aggregate prices from their liquidity providers and add a small markup, you place your order with the broker, the broker passes the order on to their liquidity provider (retaining the small difference in spread). Because you are trading against other participants in the market and not your broker, STP brokers have no interest in you losing. In fact, if you lose money and stop trading, then you are no longer earning your broker money.
The STP model is a huge step up from the market maker model and Vantage FX offers this model to all clients on our standard accounts with a minimum first deposit of only $100. Even so, many professional traders and scalpers find the third brokerage model to be cheaper: true ECN.
True ECN Forex Brokers.
True ECN is the logical conclusion of the STP model and is favoured by the vast majority of professional and high volume traders. As far as execution is concerned, the model is almost identical to STP: you are trading against other participants in the real forex market and not against your broker. The primary difference between STP and true ECN is that ECN brokers don’t make their money off spreads, but instead charge a small flat commission charge on each trade. There is zero spread mark, the spreads offered on true ECN accounts are razor sharp, often as low as 0 pips. These are very best prices available in the real forex market right at the time. Razor-sharp, zero mark-up spreads and transparent fixed fees make ECN accounts the favoured option for scalpers, professional traders and traders running automated systems that are adversely affected by wider spreads.
Just like the STP model, there is zero conflict of interest between the trader and broker when trading on a true ECN account. Your true ECN broker wants you to succeed in trading, grow your account and begin to trade size. The more size you trade, the more your broker makes. This is the way it’s supposed to be, with the broker and client’s interests in perfect alignment.
ECN accounts were formerly only available to high net worth and institutional clients, but over the past few years traders have become more savvy and there has been increasing demand for the best deal from retail clients.
So now you know …
We hope you have enjoyed this piece on the different types of forex brokers and how they work. In summary, market makers are the most expensive option for trading and actually make money when their clients lose, bad spreads are only part of the story, some traders have experienced a lot worse! STP brokers on the other hand are a huge step up and a great option for traders who are just getting started on their trading journey. When it comes to serious professional trading, scalping or automated trading though, there is only one option: ECN.
95% of retail Forex traders lose money – Is this Fact, or Fiction?
Updated: September 22, 2017.
There is a well known statistic being passed around the Forex community and there is a good chance you’ve come across it, possibly numerous times. Basically, it says that ‘95% of Forex traders lose money’.
For traders who are chasing their dream of becoming a full time Forex trader, or at least trying to achieve even part time trading success; this statement can be a bit of a demotivator.
If 95% are blowing up their accounts, the statistics imply you also will be become one of the losses.
It’s not a very comforting thought is it! In a world of failing traders, what steps can you take to become the minority who survives and make consistent returns from Forex trading?
In this article I want to do some investigating. We are going to try verify the claim ‘95% of Forex traders lose money’. We’re going to go over some supporting evidence, and attempt to conclude if this just a phrase used for scare tactics, or if it is actually based on fact.
Special thanks to War Room member ‘kin’ (marketstudent) for helping me compile the information contained in today’s article.
Let’s go through some of the factual evidence we’ve dug up that supports the statement…
The Evidence that Forex traders lose money.
China bans Forex margin trading.
According to a Reuters article in 2008, the China Banking Regulatory Commission banned banks from offering Forex margin trading to their clients.
“Eighty to 90 percent of players in Forex traders lose money, through banks providing the service were generally making a profit from it, the banking regulator said.”
This quote is useful but far from conclusive.
The profitability of day traders.
“The profitability of day traders” was an article written by Douglas J. Jordan and J. David Diltz, published in the Financial Analysts Journal (Vol. 59, No. 6, Nov-Dec 2003).
If you want to read the full article you will have to pay for it, but the abstract reads as follows:
“We used two distinct methodologies to examine the profitability of a sample of U. S. day traders. The results show that about twice as many day traders lose money as make money. Approximately 20 percent of sample day traders were more than marginally profitable. We found evidence that day-trader profitability is related to movements in the Nasdaq Composite Index.”
All this really does is support our own views on day trading. It’s harder and riskier than the longer term swing trading. But, this still isn’t enough to nail down the statistic as fact, so let’s move on…
The Cross-Section of Speculator Skill: Evidence from Taiwan.
“The Cross-Section of Speculator Skill: Evidence from Taiwan” is a research paper by Barber, Lee, Liu and Odean published on 14th February 2011 on the Social Science Research Network.
Using data from the Taiwanese Stock Exchange, the performance of day traders over the 15 year period 1992-2006 was evaluated.
The following quote on page 13 is particularly relevant:
“In the average year, 360,000 individuals engage in day trading. While about 13% earn profits net of fees in the typical year, the results of our analysis suggest that less than 2% of day traders (1,000 out of 360,000) are able to outperform consistently.”
This is a very alarming statistic, only 2% of these traders were consistently profitable. Remember though, this study only had day traders under the microscope, and didn’t look any other style of traders. Let’s look at some evidence from the brokers themselves, which factors in a broader range of trading styles.
U. S. Commodity Futures Trading Commission Regulations.
The U. S. Commodity Futures Trading Commission (CFTC) introduced new regulation in October 2010 forcing US brokers to lower the amount of leverage that can be offered to customers (maximum limits are 50:1 on major currency pairs and 20:1 on other currency pairs).
US forex brokers are now also forced to disclose the percentage of active forex accounts that are actually profitable.
Michael Greenberg of Forex Magnates has compiled the data for the first quarter of 2011.
The Magnates chart tells us that during the first quarter of 2011, the US brokers listed here reported that an average of.
25% of their ‘active’ accounts where in profit. This is a dramatic increase in percentages that we’ve seen in the other reports we previous covered. This data however is still not good enough to start base conclusions that 95% of Forex traders lose money on for the following reasons.
The chart only shows a handful of US brokers. Aside from Africa, the US actually has the smallest of the retail trading population The data collected is only really from a 4 month period, which is hardly anything The data doesn’t specify if withdrawals and deposits are taken into consideration The data doesn’t show if those accounts are experiencing growth over time, or are just simply ‘up’ from their previous 4 month figure To reinforce on the last point, are these profitable accounts over their ‘high watermark line’, or have they suffered a massive loss, but recovered a small percentage within the 4 month period therefore considered ‘in profit’
The new CFTC disclosure requirements are certainly a step in the right direction towards greater transparency in the Forex industry. However, it is important to treat the percentage figures of winning and losing accounts with a degree of skepticism for the following reasons we just stated.
All of the brokers will be eager to present themselves in the best possible light – so it would not be too surprising if the figures were subject to some manipulation. If a broker can claim to have a higher percentage of winning accounts than their rivals, this may attract new customers to open up accounts with them.
It is important to note that the data only includes “active” accounts (and the definition of “active” maybe interpreted differently by different brokers). We have no idea how many new accounts blew up in their first few months of Forex trading and subsequently became “inactive” (and thus were omitted).
Oanda in particular have been guilty of some creative accounting – their data from Q3 2010 showed that a spectacular 51% of accounts were profitable, 18% more than the nearest competitor. However it turned out that included in their definition of “active” accounts were accounts that contained no trading activity but had simply accrued interest on the account balance!
The CFTC quickly put their foot down and 6 months later we see that the percentage of winning accounts at Oanda has dropped to 38.1%.
As disclosure requirements tighten in the future, these winning percentages are expected to fall even further.
What conclusions we can make from the data.
Even with all the digging we’ve done, and all the evidence we have sifted through, we simply still don’t have enough data to conclusive confirm that ‘95% of Forex traders lose money ’.
One thing is for sure, it doesn’t look good for day traders. The evidence is basically conclusive that only.
2% of day traders can actually consistently turn a profit. This is no surprise to us though, we know day trading is a really stressful and tiring way to approach the market.
Day traders are required to sit in front of the computer for hours on end, staring at price charts while waiting for an intraday trade opportunity to present itself. Most of the day trades are placed with the intention of quickly being in and out of the market over a span of a few hours. With so many retail Forex traders engaging in scalping or day trading strategies, I am not surprised that most Forex traders lose money .
This combination of high frequency trading, and staring at charts all day is very psychologically taxing. Most day traders are failing because their patience wears too thin. They begin to do silly things in the market out of boredom, fatigue or frustration. Swing traders like us, use the core movements from the higher time frames to take easy, longer term trades. Swing traders ride out the dominant market direction it much stress-less fashion.
By doing things like trading with the daily time frame, we don’t have to spend much time in front of the charts. This gives us the freedom to set our trades, and not have the burden of constantly monitoring them for hours. The idea is to be less involved with the market as a whole.
Even though we don’t have anything 100% conclusive to support ‘95% Forex traders lose money’ it’s pretty safe to conclude that a ‘high percentage of Forex traders lose money’.
We have a few variations of this statement that we believe to be justified…
“100% of traders blow their first trading account”
“95% of Forex traders lose money during their first year of trading”
“High frequency traders find it harder to make money consistently than long term traders”
How can you avoid becoming a statistic?
All of the anecdotal and hard evidence examined in this article strongly suggests that Forex traders lose money and the vast majority of traders are not profitable. It is not really possible to arrive at an exact percentage, but we can see that the most conservative estimate suggests that 87% of traders lose. So the soft quoted 95% statistic may be a little high, but it is fair to say that trading is NOT easy.
So how can we as traders avoid being one of the losing statistics. What are the small minority of successful traders doing that everybody else isn’t?
By working with many traders in our Price Action War Room, we’re always on the front line witnessing how traders are ‘shooting themselves in the foot’. Traders who struggle to move forward, and hindering any positive progress with their trading goals all seem to share some similarities.
The trader doesn’t have realistic expectations about the market The trader is over complicating their analysis, trying to make sense of too many variables or looking ‘too deep’ into things The trader is in a bad financial situation and trading with real money that is needed for bills, mortgage etc. The trader is not using positive geared money management to ensure winning trades outperform losers The trader is trading on low time frames, chasing price and market noise instead of using more reliable data from the higher time frames The trader is spending way too much time in front of the charts and over trading The trader has no trading plan and therefore no consistency The trader opens positions during news releases hoping to catch big moves The trader doesn’t know how to take a loss The trader is impatient and doesn’t wait for high probability trade setups.
When you read through that list, how many points are you guilty of? I would bet at least a few. Don’t worry, you’re not the only one. These are everyday issues which traders struggle with and really do hinder their progress of becoming a profitable trader.
Most of the problems are generally a result of psychological weakness. Traders are ‘giving in’ to their inner demons. Unfortunately most traders never build on the character and psychological traits needed to fight these inner temptations. You really need step up, and work on personal improvement to build what it takes to be a good trader.
It’s like a smoker, drug user, or an alcoholic working to overcome their addictions. Deep down they know it’s destroying their health and lives. If they’re not determined and focused enough, it’s easy to fall back into bad habits and start a vicious cycle all over again.
The market will rip you apart, psychologically, in ways you never thought possible. The financial sector is a cruel world which can easily reduce a grown man to tears. It’s important that you understand what your weaknesses are, and face them head on. You’re going to have ups and downs in your trading journey, but just remember …
“What doesn’t kill you will make you stronger”
Do yourself a favor and go back through your history and study your losing trades. Get a pen and paper and make a list of what you think you did wrong when executing each of those losing trades.
I bet you will see a common problem reoccurring on that list. Have that list in front of you when you go to take your next trade. Use this list as a nice reminder of last few times you’ve ‘traded against your better judgement’. Hopefully that it will deter you from making the same mistake again.
Start to tackle your trading weaknesses and self improving to make yourself into a better trader. Give yourself a higher chance of not becoming a fatal statistic. Most Forex traders lose money, but that doesn’t mean you have to. If you’re struggling to find a trading system that doesn’t require you to sit in front of the Forex charts all day.
You maybe be interested in our end of day price action strategies. Stop by the war room information page and check out our price action course details.
Best of luck to you on your trading journey.
Forex junkie & price action trading specialist!
Here I share my knowledge & experinces with technical strategies, focusing on swing trading, and breakout trading.
I am also obessed with trading psychology, and my new area of research - data mining & quantitative analysis.
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