Top Reasons Forex Traders Fail Professional Traders

Top reasons forex traders fail professional traders

Though the forex market is the largest of the financial markets, there are not many forex traders that truly succeed.

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On forex analysis, it has been observed that investors do not make profits for the same old reasons that traders in other markets fail. However, additionally, some factors have been found to contribute to the fact that investors tend to take higher risks than when trading in other types of financial markets.

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The most important among these are: the high leverage ratios offered by the fx brokers make the trader use more borrowed money to increase potential ROI; and the low margins required for currency trading. Read on to find out the main reasons that contribute to traders’ failure in the forex market.

Reason #1: No trade Discipline

If a trader experiences many losses consecutively, the trader’s emotions may turn negative.

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It is important to understand that a successful forex trader is one that comes across a few big wins during the course of many small losses. A trader should not try to get the better of the market. It is also dangerous to let emotions take over during trading and give in to emotions such as greed, fear and temptation. Negative emotions can be controlled by having a proper trading plan in place and maintaining trading discipline in terms of reinvesting only the profits that are generated.

Reason #2: Trading Without a Plan

A well-laid out plan greatly contributes to the success of a forex trader.

A good plan includes risk management actions as well as the expected returns at every stage in the business.

Top Reasons Forex Traders Fail

Strategic planning will help the trader avoid many common mistakes that lead to failure. This is especially important in the beginning stages when the trader is new and inexperienced.

Reason #3: Low Level of Adaptation to the Market

That the market changes at every instant is a given.

Top reasons forex traders fail professional traders

Every trader who wants to be successful has to have a plan that would fit in with market changes. If a trader adapts to changing market conditions quickly with different strategies to suit the changes, then they have greater chances of success in the trade positions that they assume.

Most successful traders are well-prepared in advance for low-probability events and do not become surprised when they occur.

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They are always tuned to profit from the evolving markets.

Reason #4: Trial and Error

Learning from one’s own mistakes is almost always a costly experience for a new trader. Trading in the forex market is considerably different than trading in the equities market and it is common to see newbie traders losing large amounts of money. It is easier to learn from successful traders’ experiences.

Top reasons forex traders fail professional traders

This is best done by taking mentorship from a successful trader and learning the tricks of the trade from him/her. It should also be supported by sufficient number of hours of trading practice in real time by the trader.

Reason #5: Unrealistic Expectations

It is important for traders to understand that forex trading is not a get rich quick scheme.

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The trading strategies can be mastered only though persistence and recurrent trading in the market. Forcing the market to give abnormal returns usually ends in a fiasco as traders tend to invest larger capitals. The tendency to gamble makes the trader care less for money discipline rules that are in place to prevent huge losses for the trader.

Reason #6: Poor Money management

It has been observed that traders tend to lose large amounts of money if they refrain from using stop losses for fear of losing out early in the trade.

Top reasons forex traders fail professional traders

The traders should be wary when the investment outlay is larger. Successful traders usually apportion their investments into smaller portions for high-risk trades and the balance for conservative trading.

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This type of allocation also saves the traders from any low-probability events and their devastating effects.

Though most of the new traders are going to make one or more of the above-said mistakes, there are issues that are natural to the forex market which can significantly increase the risks. The significant leverage ratios that forex traders work with present a high risk issue that must be handled properly by the traders.

The Top 10 Reasons for Forex Trading Failure

Leverage is intended to help the traders enhance their returns. However, it must be borne in mind by the trader that high leverage means a proportionately high risk of losses as well that the trader can sustain. Some metatrader brokers offer a leverage ratio of 400:1 which can lead to astounding gains when the trade is closed properly and horrific losses otherwise. However, in the trader’s best interests, it is always good to limit the amount of leverage that is used.

The amount of leverage depends on the margin that the traders require for a single trade.

Not Adapting to the Market Conditions

Leverage ratios of 2:1 are commonly offered by many online currency trading brokers. As an example, for every $50,000 deposited, they allow a standard trading lot of size $100,000.

The margin is the deposit placed by the traders to shield the broker from potential losses. Financial institutions pool together all the deposits that they have into a large deposit which they use for Interbank trades.

Top reasons forex traders fail professional traders

The brokers sell these deposits to recoup their losses in case they have any.

Traders lose money when they have less money in their deposits when compared to the size of the trades that they place. The thought of landing vast amounts of money by using a small capital is what gets traders trapped in a majority of the cases.

Top reasons forex traders fail professional traders

For a leverage ratio of 100:1, it takes only a price swing of 1 percent to result in a complete 100 percent loss. This further reduces the capital and compounds the problems. It is also vital to understand that macroeconomic factors and political situations can create short-term inefficiencies that can affect currency pairs.

Final Thoughts

In conclusion, it is best that new traders understand the best practices that successful traders have put into place to make profitable trades in the forex market and follow them diligently.