According to common statistics, most forex traders endure massive loses, whereas only 4 percent are known to historically achieve profit. To join the list of those 4 percent, it is essential to be aware why people lose money on these markets.
Reason 1: Meager startup capital
Traders start their activity to make money easily or to resolve debt situations. Forex marketing encourages large scales of trading, in order to achieve large returns starting with small initial investments. However, when startup capital is scant, the risk is large and the hazard of loss augments greatly. That is why, trading with very small initial capital should be avoided by beginners. An amount about $1,000 is a reasonable solution for a start.
Reason 2: Excessive strife for profit
Traders are so enthusiastic about getting profit that they strive to get each and every pip from a move. Opportunities for making profit on forex markets are available daily. Excessive striving to get the utmost profit from each pip can lead to losing from a profitable trade. Greed can ruin forex traders, remember that! Instead, a reasonable profit goal should be targeted. Patience and reasonability, waiting for the next opportunity, is the safe approach.
Reason 3: Inadequate risk management
Risk management is one of the keys to making profits. Inadequate risk management can ruin even skilled traders. Although profit is one of the prime aims, the first and foremost goal should be to protect the available capital, and that is achieved by controlling risks. Stop orders are a must even after a reasonable profit has been made. Lot sizes used should be reasonable in comparison with the trader’s capital.
Reason 4: Refusing to close trades on loss
Forex traders often refuse to admit being wrong on a position. Instead, they add to their losing trade hoping the market will soon move in their favor, and they will make the desired profit, or even a bigger one. In most cases, however, this does not happen and traders end up losing their entire capital.
Market players should accept that there are profitable and not profitable trades. Being wrong in some positions is natural and should be accepted. Not being afraid of getting wrong, closing the trade and looking for the next opportunity is the resolution to this common mistake.
Reason 5: Hesitation in forex trading
When forex traders are not decisive enough and give up a position which does not immediately make the expected profits, they can see that later on the market goes into the desired direction. That is why, sticking to the chosen direction should be done with more decisiveness. When minor fluctuations occur in a trade, they just lead to minor loss of a trader’s account, but can yield the expected profit in the longer term.
Reason 6: Attempts on bottom- and top-picking
For novice forex traders, it is tempting to pick tops or bottoms in currency pairs. As they start trading on a pair, and the development does not follow their direction, beginners continue to add to their positions, being certain of a quick turnaround. This approach almost always leads to excessive exposure and as a result, to losses. For that reason, market players would better wait to see whether the change in the forex pair direction would be confirmed, before adding to their positions.
Reason 7: Trust in forex trading systems as a way to become rich
Forex trading systems on the internet are numerous. It is almost impossible to find a software that really works, though. A lot of beginners make the mistake of investing in new automated trading systems which ruin them on a regular basis. That is why, it should always be remembered that making money takes time in Forex trading, like in other areas. Traders should build their own system of trading as they gain experience, backtest it in demo mode and after that give it a try with real money.