It's commonly known that most forex traders fail. In fact, it's estimated that 96 percent of forex traders lose money and end up quitting. To help you to be in that elusive 4 percent of winning traders, I have compiled a list of the most common reasons why forex traders lose money.
1. Low start up capital
Most forex 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's 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.
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 shoe string. $1000 is a reasonable amount to start off with, if you trade very small. Microlots or smaller. Otherwise you are just setting yourself up for potential disaster.
2. 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.
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 sitting on.
It seems obvious but, don't be greedy. It's ok to shoot for a reasonable profit, but 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.
4. 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, and then you close your trade and reverse it, only to see the market go back in the initial direction that you chose.
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.
5. 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.
Trade with the trend. It's 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.
6. Refusing to be wrong
Some trades just don't work out. It's human nature to want to be right, but sometimes we just aren't. As a trader, sometimes you have to just be wrong and move on, instead of clinging to the idea of being right and ending up with a blown account.
It's 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.