Foreign Exchange is the process of changing currency from one currency into another currency, due to various reasons like trading, tourism or commercial, these are the three main reasons for currency exchange. Forex market is being traded more than $5.1 trillion just in a single day. Starting in the forex market is always complex. Before entering into this market, consider the fact that around 96% of forex traders lose their money and end up quitting, this is because new traders have tough timing gaining the ground in this market.
Getting started into this market is a bit complicated for the new investor because you should gain a lot of knowledge about this market if you want to avoid losses here. Generally, new traders have different habits when they are trading which either leads them to profitable trades or makes them face huge losses, depending upon their trading habits.
Why Retail Traders Fail?
Here, we will see different reasons why most forex traders fail:
Many traders feel that they need to get most till the last pip out of the move in the forex market, they want to make money from every trade they begin and they believe money to be made in the forex market each and every day. When a trader tries to grab every last pip before a currency pair this might cause him to hold positions for too long and it will result in losing the profitable trade.
This is the important reason behind most traders face losses in this market, so being a forex trader, don’t be greedy and it is okay to shoot for a reasonable profit, there are too many pips to with. For a trader, greediness must be avoided and forex trading should be carried on as per the market sentiments.
2. INSUFFICIENT CAPITAL
Most investors know the fact that it takes money to make a return on investment. But, when you enter into the forex market, one of the great advantages you would have is the availability of highly leveraged accounts. It means forex traders with insufficient or limited starting capital can still do big trades.
But, leveraged accounts are not the solution for your trading problems, because, with highly leveraged accounts, you will find yourself being emotional with each swing of the market’s ups and downs. So, how you can solve the problem of limited capital as a forex trader? You can also sign up with forex micro trading account which requires very minimal starting capital.
3. NO TRADING PLAN
The trading plan is one of the crucial factors you need to consider in forex trading. What you can expect from the business which has no plan/strategy or they are not following their business plan? Obviously, failure! Similarly, in trading forex, you need to be very conscious regarding your trading plan.
Trading without any plan or strategy is like shooting in the dark, you don’t know where it will go, so having a plan is very important in forex trading. And, having a plan would not be effective until you actually follow that trading plan, make sure you are following the plan in an effective manner. Here, we can conclude that trading plan plays a significant role in currency trading.
4. TRADING ADDICTION (OVERTRADING)
Trading addiction is one of the worse things forex traders have, this is another great reason why most forex traders fail here. Traders with trade addiction do something that institutional traders never do like, chasing the price. This is because forex trading can bring a lot of excitement, but that doesn’t mean you overdo it.
Trading addiction can bring a lot of stress when the market moves in an unanticipated direction. When a trader enters into trading addiction, it becomes difficult to come out from that addiction. This is the time when a trader needs to recognize that some moves are not worth taking and try to come out from this addiction as soon as possible.
5. POOR RISK MANAGEMENT
Forex market consists of high risk, this is the market where you need to have good risk management skills, it is the key to survival as a forex trader. Even a skilled trader could also be wiped out with his poor risk management skills. Generally, it is found in new traders that due to greediness they forget to manage risk and put all their money to stake, which is the best example of poor risk management.
When trading forex, the first thing you need to remember is to think of not to make a profit but instead, protect what you have. To effectively manage the risk, place stop-loss orders and move them after you have a reasonable profit.
6. NOT ADAPTING MARKET CONDITIONS
Forex traders need to flexible and must adapt and accept the current market conditions or sentiments. Traders assume that one proven trading strategy would be enough to produce great winning trades; this is another great reason why forex traders fail. Markets keep changing, they are not static and adapting present market conditions is very important.
A forex trader needs to track down the changes occurring into the market and adapt to any market conditions that may occur. A trader is considered to be effective when he is flexible and ready to adapt to changes occurring in the market because this market changes not only present a few risks, but it also presents new trading opportunities.
Implementation or execution is another significant aspect of the currency market. Planning is an important factor, but the plan without the implementation would not give you any results. All the successful forex traders have plan or strategy on their minds, they do not enter into any trade randomly, and this allows them to make huge profits, more than the average trader.
A great plan achieves success only when you implement it. So, firstly, you need to make an effective trading strategy and then, implement your strategy in an effective manner. Generally, new traders to make the perfect trading plan, but it do not make sense until they execute that plan properly.
8. POOR MONEY MANAGEMENT
Poor money management considered to be the most important reason why forex traders fail. As we know, this market is all about money, so for a forex trader, he needs to have proper money management skills. The lack of money management would lead to improper utilization of money and ultimately the wastage of your money.
The lack of money management skills is generally found in new traders; also, they do not seem to care about stop-losses, which is very important in forex trading. New traders usually make a mistake when they overuse leverages. Leverages are very helpful in trading, but overuse of anything would always give you bad results. Hence, a trader should be able to do proper money management.
9. WRONG BROKER
Broker plays a very significant role in your trading, if you have found the wrong broker, it would not take you to your trading goals. With the increase in forex traders, the number of unregulated forex brokers is also increasing, so choosing the best one out of the list of brokers is a bit complicated task. You need to consider different factors before choosing a forex broker like reviews, the popularity of the broker, leverage provided, etc.
Forex brokers cheat traders in different ways like markups, stop loss hunting, slippage, re-quoting, leverage, swap, etc. They cheat traders because of the lack of knowledge and efficiency in forex trading. Even some reputed brokers use some tricks to cheat their clients and to gain as much money as they can.
10. LACK OF KNOWLEDGE
Making mistakes and learning is human nature, but what if you are making mistakes consistently in a particular field? This happens only when you really don’t have a clear idea about that field. Similarly, in the currency market, traders fail because of lack of sufficient knowledge.
So, how a forex trader can increase knowledge about this market? For a brand new investor, it is suggested to first learn about the basic terminologies of this market and start with a demo account, it helps them in having the basic idea of this market. After you learn from the demo account, you can also sign up for a small trading account, you can start with as minimum as $100.
Leverage simply means that you speculate with the money that you actually don’t own and the worse thing is you pay interest on it once you hold positions overnight. Leverage could be very helpful in some market circumstances, but not all the time. Leverage is the only reason why brokers started to become market makers.
The reason why most brokers offer you high leverages is only because to get most from their clients. New traders don’t understand the adverse effects of taking leverages, they simply found it very useful. With the high leveraged account, the trader would find himself being emotional with each swing of the market’s ups and downs. So, leverage is another reason why forex traders fail and end up quitting.
12. PURCHASING THE WRONG TRADING STRATEGY
The way you trade and your trading strategy has a great impact on your trading life. As a forex trader, you should be able to identify the right strategy for you. Purchasing the trading strategy can actually help you a lot and reduces your work, but before implementing any strategy, you must look out at it.
Purchasing any strategy randomly and executing it without knowing it, would obviously lead to huge losses. Forex market is a very complicated one; you need to understand market sentiments properly before applying any strategy. So, purchasing and implementing the wrong trading strategy would not give you any profit, instead, it would lead to big losses.
13. NO TIME
Many investors enter into this market by thinking that with 10 minutes of reading and a mobile device would start giving them consistent profit, but it is totally a myth. Being a forex trader, you must spend time on understanding this market and present market conditions, and trade accordingly.
A professional forex trader spends time as much as you spend in a day job. Being a professional trader, you need to be consistent and give sufficient time, so that you can learn market sentiments and make your trading plans and strategies accordingly. Consistency is important because the forex market is changing constantly; you need to have good information to make effective forex trades.
14. TOTALLY RELYING ON FOREX SIGNALS
Forex signal is the suggestion to the trader for entering a trade on a particular currency pair. Forex signals are sent out by human analysts or automated forex robots or analytical program or the combination of them. It’s all up to a trader whether he wants to follow that signal or not.
But, many traders blindly follow the trade signal they receive and this is another reason why most traders fail in this market. Many new traders follow signals of unregulated brokers and unregulated forex signal services providers, due to lack of knowledge. It is important to note that, a signal should not be followed blindly, without analyzing it. It should be followed only when you analyze it and find it legit.
15. UNACHIEVABLE TRADING GOALS
As we know, a trader must set trading goals, but before goals setting, make sure goals are achievable and ideal. It should be prepared in such a manner that it meets your trading plan and strategies. This is another reason why most traders face failure.
This is generally found in new traders, they set the goals too high and when they found they are unable to achieve the milestone, they start overtrading; at last, they face huge losses and end up quitting. So, it is advisable for traders to determine the goals that are achievable and meaningful.
It doesn’t matter whether it is forex trading, stock trading or any other trading, when it comes to the risk factor, fear of losing is the common psychology of human. In the forex market, when a trader trades with fear of losing money, there it becomes difficult to achieve his trading goals.
Emotional trading like trading with fear makes your trading strategy or plan worthless and ineffective because you cannot actually focus on your trading plan due to the fear factor. So, a trader should not take trading decisions emotionally.
17. UNREALISTIC EXPECTATIONS FROM TRADING
Having unrealistic expectations from trading is another significant reason why forex traders do not get the most from this market, especially newbies. Usually, experienced traders have realistic expectations and that helps in relieving some psychological pressure that comes with trading.
For first-time traders, it should be kept in mind that forex is not a means to get rich quickly; generally, new traders enter into this market with high expectations of making millions overnight. But, they don’t know the fact that trading requires hard work and thorough research.
18. IMPROPER TRADING TOOLS
In forex, trading tools play an important role, they can either paid by subscribing to a service or they are offered free of charge by a trading platform provider, different forex websites or by your broker. The main thing here comes is the selection of an ideal tool, if you are using random forex tools, you might face loss.
So, you need to be choosy when it comes to forex trading tools. You need to research and find out the best trading tools that can help you in the proper implementation of your trading strategy.
19. LACK OF TRADING DISCIPLINE
The biggest mistake any forex trader makes is to let their emotions control their trading decisions. To become a successful trader, you need to stick to your trading plan and become consistent with research and analyzing market conditions. Lack of trading discipline would ultimately result in huge losses, so instead of getting distracted due to some losses, you need to prepare yourself to achieve the trading goal.
20. LEARNING THROUGH TRIAL & ERROR
This is one of the expensive methods to learn forex, which should be avoided. Instead, of learning through trial and error, a trader should learn through formal trading education or a mentor relationship with somebody who has a notable track record.
Another option you have available to learn about this market is, to sign up with forex small trading account. Small forex trading account could be opened with very minimal starting capital and you can explore this market completely through it.
As we have seen, around 96% of forex traders lose their money and end up quitting, but you can actually be in that 4% traders if you learn and consider the above elaborated 20 factors, these are the factors responsible for the failure of most forex traders.
If you are a new trader, you must focus on learning this market in detail, you should gain as much knowledge as possible, from the right sources. But, one of the best ways to have your first forex trade is starting with small forex trading account.