Beginners Forex Education Forex Basics

The Truth About Why You’re Failing at Forex

There are a lot of traders out there. A lot of them are experienced and a lot of them are completely new. The one thing that the majority of them have with forex is that they are simply losing. Yes, they are losing money. You have probably seen the warning signs from pretty much any forex related site, stating that the majority of people that trade forex or any sort of CFD will lose money. So why do we still trade? It is because of the potential, but in order to achieve that potential, we are going to need to work out why it is that so many traders are failing when it comes to forex trading.

Some reasons are based on the individual, some through inexperienced and some through simply making mistakes, common mistakes that a lot of people make. We are going to be looking at some of the main reasons why people fail at forex trading.

Lack of Risk Management

Something that should have been cemented into your mind when you read any sort of trading course or help site is that you need to have a risk management plan in place. Yet it is something that a lot of traders still fail to do, and when you fail to do this, you are failing to trade properly. The risk management plan outlines a number of different things including trade sizes, stop loss distances, your risk to reward ratio, and more. It is paramount that this is in place, its sole purpose is to protect your account and to help you prevent yourself from making large losses. So we really don’t understand why people trade without one, either through lack of understanding or simply being too lazy to follow one. Get a risk management plan and stick to it, you simply cannot be successful without one and will fail if you don’t use it.

Not Using Stop Losses

Part of the risk management plan that we mentioned above is your stop losses. These are basically automatic stops that you can place on your trades. When the price of the markets move up or down and hit these levels then your account will automatically close. They are there to help protect you from bigger losses than you planned for, yet so many people refuse to use them. Again, this may be through simply not understanding their use, but for many. It is simply the fact that they do not want to and for this reason, they often lose their accounts. You need to have them set, every single trade needs to have one, no matter what your strategy is. If you are the sort of person that doesn’t set them and instead wants to manually watch your trades then we would suggest you rethink, these are hard stops, they protect you, use them. Otherwise, a single trade could be enough to blow an account, and it has happened many times in the past.

Trade Sizes Too Large

The size of the trade that you place relies on a number of things. It is decided based on your strategy as well as your current account size. If you place trades that are too large, then you are placing your account under an increased amount of risk, not something that you want to be doing. If you have an account size of $1,000 and place a trade size of 0.01 lots then you have a lot of room for movement. However, if you use your leverage to place a 1 lot trade, then it won’t take much movement in the markets to simply blow your account. You need to place your trade sizes responsibly, yes the larger the trade size the larger the potential profits, but the losses are also potentially larger. Stick to appropriate trade sizes and do not try to push them too far.

Overleveraging Your Account

Leverage is a wonderful thing. The brokers are basically lending you money to place trades larger than your account would otherwise be able to place. It is something that you should take advantage of, but unfortunately, a lot of people do not understand the darker side of leverage, the side that can cause you to simply blow your account. When you leverage your account, you will be placing larger trade sizes, and these give more profit potential but also more loss potential. We see $100 accounts with a leverage of 2000:1 placing 1 lot trade sizes. The markets only need to move a few points before the account will blow. You need to use your leverage appropriately, even with a leverage of 2000:1, you do not need to use it all with every single trade. Remember to follow your strategy and do not place trades too large just because you have the leverage to do it.

Quitting Too Early

People don’t like to lose, and that is understandable, but people also should not quit at the first hurdle. Many people from many walks of life have tried things, but do you think that any of the successful ones have quit after their first lesson or two? When you leave after your loss, you are basically accepting that you have lost that money and have walked away. It should be that you were never serious about trading and never serious about wanting to make the money that you are upset that you lost. You cannot quit too early, losses are a part of trading, just because you experienced one does not mean you are a failure or that you should give up. You need to keep going, even the best forex traders fail, but they are the best because they did not quit, and neither should you.

Being Distracted

Let’s be honest, it is easy to be distracted, and far easier in these modern days than it was before with all the different devices that we have to entertain us. Yet when we trade, we need to try and get rid of everything that we do not consider essential. Get rid of the TV in your trading room, get rid of your phone, get rid of anything that can distract you. We have made losses through distractions in the past, we are sure that the majority of traders have, but it is something that we can very easily deal with. Distractions will take your mind off your trading, placing wrong stop losses or take profits, trades too large, and so forth. You need to be focused when you trade, if not, mistakes will happen and you could ultimately fail if you experience too many of those mistakes.

Those are some of the reasons why people fail. If you make a loss to begin with, do not panic, that is pretty much expected of all new traders. In fact, if you are profitable in your first few months, either you are amazing or simply lucky. However each time you make a loss, take a look at the trade, try and work out why you lose, some you will be able to make adjustments, others may have just been unlucky, but use it as a learning experience. Doing this with each trade will enable you to be better, and the better you are, the less likely you are to fail.

Forex Risk Management

Trade At Your Own Risk, Not Others

One of the main lessons that any new trader gets is how to set out their risk management plans, there are a lot of different ones out there and you would most likely have been told a number of different things yourself by different people. There are people that go by what seems to be a new industry standard of 1% to 2% of your account per trade, however, you still often see people a little more aggressive, going up to 5% or even 10% per trade.

The thing is, that all of these styles and risk management plans are perfectly valid, it can be confusing to see so many variations and you can often wonder if they are all safe. The fact of the matters that you will never know which one is right for someone else, as you would need to be able to access their mind, to be able to work out what their risk tolerance levels are and also what sort of money they are using, expendable money (the stuff you should only be trading with) often comes with a much lower risk threshold, people are willing to risk it more than hey ould with money that they may actually need. It all comes down to personal preference and this is what you should be looking at when working out your own risk management plan.

It is important that we get a basic understanding of what risk tolerance is, we need to be able to know what it is for you and that is what is important. Think back to times where someone may have offered you a gamble, would you take it at 50/50 or would you only take it when it reaches 75/25? Knowing what stage you would take the gamble and how much of your trading account you are willing to risk will help you to create your own risk management plan that suits you and one that you will be comfortable with.

A lot of things in the real work you are often advised to seek financial advice, from an accountant, a lawyer or simply your bank, this is often the sensible thing to do as they know what is best, but the difference between them and reading is that they work in a world where the same advice is relevant for everyone, the same rules apply to everyone. When we are trading, this is not the case. Something that works for one person could be a nightmare for someone else, so this is why we always need to look at things at a personal level when walking about risk management and that is why we say that you should be trading to your own risks and not to what others are risking.

When you started trading you would have created your trading plan and as part of that plan, you should have created your risk management plan. People often look online for help when creating these things, especially when not sure. So let’s assume that you got stuck and went online to see what risk management other people use, you see someone doing quite well risking 5% of their account with each trade, they are doing well so it must work, the problem is that you do not know what their strategy is, it may be completely different to your own, so implementing their risk plan into your strategy could lead to disaster as your strategy is not based around it. The same can go for your own sanity and stress levels, if you are quite a risk-averse person, risking a larger percentage of your account will mean that you will be in a constant state of stress and dread, if you aren’t comfortable with the risk, then you should not be using it.

The experiences that people have had often influence the risks that they are willing to take, those that have a lot of experience within the financial markets or just with finance as a whole are often willing to take larger risks as they have a better understanding of how to manage it, those coming in new are often more reserved, wanting to ensure that they are safe. Of course, there are exceptions to this, some professionals risk very little and some newer people come in with the wrong expectation of being rich and so risk too much, but that us a lesson that they will need to learn by themselves, no amount to telling will stop them from making that mistake as the draw of money is just too strong for them.

A reason why it is so important that you only risk what you are comfortable with is that you will experience losses if every loss makes you lose 10% of your account, it is going to destroy your motivation swing profits wiped out with every single trade, this is why many people go for smaller amounts such as 1% or 2%, a loss will still hurt, but it will not take away a large portion of your account. What is important, is that the risk management is built into your own plan and what it is based on your strategy and your risk tolerance, do not go out there looking for what other people are doing, this will not suit you and will not suit your strategy.

An important aspect of risk management is working out what works for you, this can be done through trial and error or by a lot of planning and demo trading. What you do not want to do is to be suckered into those that are stating that they have made tons of money by risking certain amounts, they are often exaggerated or sometimes completely fabricated. It is great to use others for inspiration or to use their knowledge to help create your trading strategies, but one aspect that you should avoid is the risk plans that they have. This is something you need to create yourself, by yourself, of course, you can use a baseline of 1% or 2% that is often suggested, but only take that information, work out the rest yourself.

One good way to help work out your tolerance levels is to use a demo account, of course, a lot of the emotion won’t be there as you are not risking your own money, but it is a way of working out what sort of risk suits your strategy. If you are consistently profitable with a risk of 2% but not at 1% then your strategy may require the higher risk. Set stop losses, if you find yourself closing off trades manually before it reaches the stop loss, then you may be risking more than you are comfortable with, use the demo account to help alter things, fiddle with things until you come to something that works for both you and your strategy. It can often take quite a long time to find the perfect spot, in fact, a lot of traders never do, but you can always get close. Keep practising, keep adjusting and you will get there in the end.

I know we have mentioned it a number of times, but do not go out there and copy others, it is paramount that you do what is right for you, not what is working for others. They have different circumstances to you and so their plan works for them, but it may be a terrible idea for you. It will take time to work out exactly what you are comfortable with, and that is fine, everyone will have different tolerance levels, you may start too high or too low, you can adjust things as you go to ensure that you eventually come up with the strategy that works perfectly for you.