Why do most forex traders lose money?

All people who start trading will eventually come across the well-known statistic that 90 percent of traders fail to make money consistently when trading the markets.

In fact, this statistic states that over time 80 percent of the traders lose, 10 percent of them break even and only 10 percent make money on a consistent basis. This statistic does not change based on a person’s location, age, gender or a person’s intelligence. Everyone wants to be in the top 10 percent of those who make money when trading the financial market, but few are willing to put in the time and effort to achieve this seemingly impossible task. It seems a bit silly to ask as a question, but when we give a presentation, we ask those present if they want us to teach them what the 10 percent of traders know or what the other 90 percent know, and every time they say the 10 percent. To me, the answer to understanding the 10 percent is simple but even when people are shown the truths about trading, people often find their way in the 90% bucket, but why?

To be successful in trading and in life, you need to avoid the mistakes that unsuccessful people commit or learn very fast after making them once. You need to do what the majority of traders don’t do. This may seem easy but it is the most difficult thing in the world, after all, how could know what you don’t know? How does a newbie trader work out from the abundance of information out there what they should be doing?

First, let us explore the reasons most traders fail to make money consistently when trading the markets- including futures, commodities, forex, options and everything else that can be traded. More importantly, how to avoid being part of that 90 percent and what steps you need to take to work your way toward the 10 percent of successful traders.

There are three simple rules to successfully trading any financial market In short, the solution is so simple we can break it down to an even simpler equation: Understanding + Practice + Discipline = Success in trading There are successful “traders” who have made big money by placing one or two trades, we would not count those individuals as successful traders but would rather class them among other lottery winners. In fact, all successful traders we have ever spoken with have followed steps similar to the ones below:

Phase 1: All of them had to gather the necessary knowledge

Phase 2: After forming a reasonable base of knowledge, they further developed their trading acumen through experience and practice.

Phase 3: Understanding and practice on their own is meaningless without putting real effort behind the actions.

A successful trader needs to be disciplined and develop a real passion for the craft. Anyone can go through a textbook explaining trading theory but without any real passion behind the effort, that person may as well be multiplying their trading knowledge by zero. Another annoying statistic that is often propagated is that learning to trade successfully can take between 2 and 5 years. We personally hate this statistic as it imposes a limit on the human spirit. We believe that anyone can find success in any discipline through sheer will and commitment.

Statistics are a useful tool to give someone a general idea about a particular topic. In trading, no one wants to be average since average people lose, don’t be average, be in the 10% and put forth the required effort.

Keep it simple

New traders tend to complicate everything. They think winning means understanding long and elaborate formulas and long nights of financial analysis.

Truth is, Hollywood sells a lot of movie tickets to shows like, “Good Will Hunting”, “The Social Network” “21” “A Beautiful Mind” etc. but that type of genius is simply not necessary in trading. Finance professionals like to make it look like day trading is very complicated and average people wouldn’t be able to keep up.

What’s worse is that marketing companies spread the 90% Lose and 10% Win statistic EVERYWHERE making it look like real success is nearly unattainable without their special course. All the information you need to be successful can be found in your local public library, but sadly, people like to be spoon-fed and want instant gratification and are therefore willing to pay big bucks to feel like they’ll learn the “secret” to trading…

Popular reasons why forex traders lose money trading

Insufficient Knowledge

You don’t start operating on a human knee because you’ve watched a YouTube video of a doctor performing surgery. You don’t immediately start professional boxing because you thought you could make a lot of money. You don’t skydive on your own without being shown how to deploy your parachute.

The 3 examples above seem to make complete sense when you really think about it, yet people begin trading and risking real money without fully understanding the game. Yes, the trading world is a game, there are real losers, and real winners. So many people think they are traders because they buy and sell a few shares here and there but when asked why they bought or sold those shares, they’ll give a vague response about something they read in the newspaper or something they heard from their friends.

They may have looked at a chart but can’t begin to hypothesize why a market may have rallied technically or broken down below support. Someone who has learned the basics of trading, however, understands the importance of creating a trading plan, how to analyse a chart and know the exact reasons why they are buying or selling and the exact percentage likelihood of that trade being successful. Moving past the basics, that person begins to understand the importance of applying money management principles and how to maximize their profits while keeping their losing trades small.

Thinking trading is a get rich quick plan

The nature of trading attracts people who are willing to accept a higher level of risk. Usually, these people are risk seeking and have a tendency to persevere in other areas of their life. Sadly, perseverance in trading can be catastrophic to a newbie trader’s capital. While people can get rich quick trading, it’s not the norm. Most people who do get rich quick, did so through a lucky trade on a long term bull or bear market and kept increasing their position.

That being said, you don’t need $100,000 in your trading account to make a real go at it but starting with less than $1000 makes it near impossible to generate enough money to live from. If you don’t have enough money to begin, don’t get discouraged. Becoming a successful trader and being able to prove it is all you need. In fact, we know several prop trading firms that simply require you to achieve success in a demo trading account prior to hiring you to trade their capital. Think about it, if you can show proof that you consistently take successful trades, minimize your loses and showcase professional money management techniques, what more would you need to show?

Human beings are hard-wired to lose in trading

If you’ve been around trading for years or are just starting out, you’ll notice the term “psychology” plastered everywhere. It’s so interesting how most people ignore that subject in their new trading book and skip over that section in the podcast series as it’s the most overlooked and important aspect of trading. Human beings feel a great deal more when they lose than when they win.

Think about the casino, if you walk into a casino with 100 dollars, lose 50 dollars, then immediately make 50 dollars and walk out of the casino, you still have 100 dollars in your pocket. What would you feel at that time? Most people feel indifferent. They just doubled their money from 50 dollars to 100 dollars but they see it as breaking even from the moment they stepped into the casino. Now if another person simply loses 100 dollars and leaves. That person has effectively lost 100 dollars. The person who loses 100 dollars “feels” significantly more than the person who walks out with 100 dollars. We are not talking about feeling good or feeling bad but simply about how “intense” the feeling is. In short, people HATE to lose way more than they love to win. Losing is an awful feeling and people will naturally chose to avoid losing if they can, even if it means taking more risk. How does all of this translate into trading?

After gaining a bit of knowledge in trading and even placing a few trades, some people will be unfortunate enough to win their first few trades. We say “unfortunate” as this leads them in thinking that trading is easy and they start calculating how much money they’ll be making at the end of the year if they simply keep up their efforts.

They begin thinking they know where the market will go and sometimes the successful trades they take reinforces this new found confidence. At some point, something will happen in the market and they’ll believe with absolute confidence they know where the market will go next. Because of the level of their confidence, they take a trade that is significantly bigger than their normal trade size. This trade may go in their favour at first but often will retrace against them, since the trade is so much larger than normal, the negative position they see in front of them makes them nervous and brings on anxiety.

If the market continues to move against them, they may re-enter the market thinking the market is giving them an even better entry. Sometimes, the market will pull back and the trader will exit their losing position with a zero loss, avoiding that big loss for one more day.

At some point, the market often continues to go against them, deepening the size of their losing position further. A small loss at the beginning has now turned into a major draw down of their trading account, as the trade approaches their protective stop-loss, they feel that the market can no longer move against them and they choose to move their protective stop to give the market more room to breathe. At some point, and every trader is different, the trader will move the stop loss so far away that if the market was to go against them by that amount, they would lose the entire balance of their account, that one trade is often called the “game ender” and the cause of so many accounts being blown up.

This entire process is all driven by the fact that humans hate to lose and hate to be wrong. In trading, this prideful issue needs to be quickly addressed and a new thought process needs to be developed.

The best losers often make the best traders. New traders often take a narrow view of the market by watching their trades daily or even hourly and tend to make decisions based on short-term market movement. This leads to over trading as people chase markets in an attempt to regain previous loses as they inevitably increase the size of their trades. Another common mistake new and experienced traders make is exiting their winning trades too early and letting their losers get bigger.

In those cases, people are happy taking a $500 win and letting a $1000 loss stay open in the hopes of their trade turning around, in statistics, that doesn’t make any sense. That would be similar to playing heads or tails and agreeing to receive $100 when heads is flipped and paying $200 when tails is flipped – would you play that game 10 times in a row knowing the odds are 50/50?

10 biggest mistakes in forex trading

As discussed previously, humans are not naturally built for trading. Mistakes in the financial market is common and often leads to familiar trading mistakes. These trading mistakes are often seen with new traders on a regular basis. People need to be aware of these errors if they are to have a chance of being successful in forex trading. Everyone makes mistakes, this is especially true in trading but understanding the logic behind these mistakes can provide the trader with insights that will help them profit from other people’s mistakes. Let’s take a look at the 10 most common forex trading mistakes.

Trading without a trading plan

Frequent random trading will lead to failure. Traders without a trading plan tend to be random in their approach because there is no consistency in how they place their trades. A proper trading plan has specific rules and guidelines that includes when to enter each trade as well as precise rules that explains when to exit each trade.

Trading is not supposed to be exciting, excitement implies random and random implies you are guessing or gambling. A trading plan is simply something that has been tested, it includes statistics that will tell you what the odds of success are on each trade and that trading system has been back tested and should have a reasonable probability of making you successful.

Using too much leverage

Many new traders believe that more leverage is equal to more money. This couldn’t be further from the truth. In fact, more leverage often leads to an earlier account blow up for many new traders. In reality, traders should only be risking 1-2% of their trading capital per trade.

A leverage of 20:1 or 5% is often more than sufficient for most professional traders but most brokers will offer 500:1 in leverage (0.20%) as that allows traders to take bigger trades. By taking bigger trades, the broker profits from more spread revenue and more commissions paid – benefiting the broker, not the trader.

Selecting the incorrect time interval

Each trading style should be based on a specific time interval. Scalpers will trade on shorter time frames and position traders will observe larger time frames. It’s important to keep in mind the larger trend at play prior to entering trades as the probability of success is dramatically increased when a trader enters a trade in the direction of the bigger trend.

Lack of research

Many forex traders will enter trades on random unfamiliar markets. For example, some traders will enter a position on GBPUSD the same as they would on AUDUSD. While the reasons for entering the trade may be based on sound technical analysis, the size of the position should be adjusted based on the average true range of that market. In short, those two markets don’t move by the same amount on any time frame. In general, the GBPUSD has a much higher degree of volatility compared to the AUDUSD and position sizes should be reduced to keep the amount risked consistent. Not understanding the market you’re trading and reacting to media or baseless advice should be avoided without sound analysis or a systematic approach.

Not understanding the relationship between risk and reward

Going back to our previous example from earlier, you would not play heads or tails if you had to pay $200 every time tails was flipped and received $100 every time heads was flipped, would you?

Let’s write this out to be clear. If you flip a coin 10 times and 5 tails are flipped, and 5 heads are flipped, you would receive $500 from the head results and you would pay $1000 from the tail loses, netting a $500 loss. If you are willing to tolerate a $500 loss in a trade in hopes of it turning around and exiting the trade with a $0 loss, you suffer from this mistake and need help understanding risk management.

Emotion versus Logic

Without a trading plan, it’s nearly impossible to not trade with emotion. As we’ve discussed previously, if you trade based on emotion, you are likely to increase the size of your positions after a series of losing trades. Those actions will eventually lead to a total account loss. Also, by trading on emotion versus logic, it’s nearly impossible to calculate your expected profit per trade as everything you do is random.

Random trade sizes

The size of your trade is important in every trading strategy. Most traders take ridiculous positions in relation to the size of their trading account – chasing that get rich quick dream. The risks taken with these large positions have the potential to wipe out entire account balances as we’ve discussed before.

For example, if you deposit $20,000 in your trading account, you should not be risking more than 2% of your total account per trade. If I take a trade on gold for example, I should not be losing more than $400 on that trade which would represent 2% of the total account. Hopefully, by risking $400, I am trying to make a profit of $800 which would represent a risk-to-reward ratio of 1:2 = good strategy as discussed in the section on risk-to-reward.

Trading random markets

Professional traders only trade a few markets. There are thousands of products to trade but the pros stick to only a few. Why? They stick to a few because they understand those markets really well, they are in-tune with those markets. Some will trade only stocks, some will only look at forex and others find impressive opportunities in the cryptocurrency market.

As with everything in life, when you really understand something, the probability of you taking a winning position on it increases.

Not learning from past trades and reviewing

This one is a mistake that many experienced traders still commit as it requires more work. The benefits of reviewing past trades are incredible. Nothing serves as a better lesson than losing money. Reviewing past losers really allows us to learn from our mistakes. The best traders in the world keep a trading journal of every trade they take and notes on why they entered those trades. This process keeps them honest, allowing them to execute their trading plan flawlessly.

Choosing a Broker

How can you pick the right broker? Generally, the broker will be a publicly traded company and regulated in a 1st world country. Be very wary of brokers that barely charge anything to take trades – they need to make their money somehow…. There are many websites that do a deep dive into each broker and compare and contrast them for your benefit.

The trading platform is also a crucial point of consideration. Many brokers offer their own proprietary trading platforms which can provide advanced trading tools and many will offer the widely-known MT4 platform. Safety and credibility are the main points of consideration when selecting your broker, then costs.

Summarizing common forex trading mistakes

In short, educating yourself is the first step in becoming a successful trader. Just by reading this article, you are already on your way there. After the education, comes the practice. After the practice comes dealing with your human self and understanding how to handle your emotions while trading. Once you’ve developed a trading plan that works with your personality and have mastered your emotions when it comes to trading, you can select the best broker for you.

Forex Trading Performance Statistics

Do want to know how to tell a fake trader from a real trader? Ask them what their maximum draw down was over the past 6 months. If they don’t give you a satisfactory answer, ask them what their expectancy is per trade. If again, they let you down with a unsatisfactory answer, you can comfortably rule them out as a successful trader and count them among the marketers of the trading world likely trying to sell you someone else’s trading system. Your trading statistics also known as “performance statistics” allow you to see what is working, what’s not working, and what needs improvement. At the very least, you need to know what the following statistics mean:

Net Profit

As in business, how much money did you make after costs? That is your net profit. Take the total revenue, subtract your expenses and costs, and you’ll arrive at the net profit.

Win %

This one is incredibly important. How often to you win? Out of 10 trades, if I win 4 of them, my win % is 40%.

Loss %

As with the win %, the loss % is valuable. Out of 10 trades, if I lose 6 of them – my loss % is 60%

Biggest Winning Trade

Your biggest winning trade should be removed from your “average win” statistics. You don’t need to remove this large win, but if you do have an abnormally large win in relation to your other wins, then taking it out will provide a more relevant look at your overall statistics.

Biggest Losing Trade

Same reasoning as your biggest winning trade, your largest losing trade should be removed from your “average loss” calculation.

Average Win per Trade

Another crucial statistic, the average gain per winning trade is calculated by dividing the total gain from all your winning trades divided by the number of winning trades. Essentially, this answers the question,  “on average, how much do you win on your winning trades?”

Average Losing Trade

Same as above, the average loss per losing trade is your total loss from all your losing trades divided by the total number of losing trades. Ideally, the average loss is smaller than your average win. When that happens, you can lose more often than you win and still make a profit in trading – the pros understand this above everyone else!

Payoff Ratio

Once you have your average win per trade and your average loss per trade, you can calculate the payoff ratio per trade. This is your average winning trade minus your average losing trade. If your payoff ratio is $180, then every time you enter a trade, you can expect to make $180 on that trade.

Average Holding Time per Trade

Often, the longer the trade is held correlates to larger profits. By analyzing the length of time you hold each trade, you may be able to find a pattern and adjust your trading strategy accordingly.

Profit/Loss of Long trades versus the Profit/Loss of Short trades

Bear markets often fall quickly and bull markets often take longer to rise. By analyzing your trades based on direction, you may be able to see if your strategy performs better going long or better going short.

Consecutive loss streak

Heads or tails is a 50/50 game but it’s possible to flip heads 10 times in a row just like it’s possible to take 10 losing trades in a row. You need to see what the worst case scenario is. While a good system is one that is profitable, if that system has 99 loses in a row before seeing 1 win, the trader is not likely to stick to the game plan and will likely lose too much money prior to seeing a profit.

Maximum Draw down

Similar to the losing streak statistic above, the maximum draw down is the worst period of your trading system. If you start with $10,000 in your account and end the month on $11,000, you would have earned $1000 that month or a 10% return which would be great. However, if the trading account had dipped below $5000 that month prior to bouncing back and rising to $11,000, then I would have suffered a 50% draw down of my account and that would be far too dangerous of a trading system.

Expectancy – the most important statistic

To keep it simple and without the formula, expectancy is the average amount you can expect to win or lose per dollar at risk. You can calculate your expectancy by multiplying the loss percentage by the average loss and subtracting that result from the average win multiplied by the average win. Undoubtedly, this is the most important statistic when comparing various trading systems.

Trading Journal

We discussed this in the previous section but tracking your trades is imperative and all the pros do this. You should keep a journal of all your trades. Often, new traders think this will require a great deal of work but building a simple excel sheet will handle most of the work for you. Also, if you think this will require too much work, you are likely placing too many trades. If you only trade 3-5 times per week, the work here is minimal and you can really be thorough with your trading journal. The main objective of collecting and calculating these statistics should be to find ways to maximize your expectancy and to isolate those “bad” trades so you can learn from your mistakes. After keeping track of your trades in a journal and accessing your trade statement through your trading platform, what do you do with this information, it’s quite simple:

• See what works and keep doing that.
• See what is not working and stop doing that
• To understand what is working and what is not working, you can dig through the data yourself or you can seek the help of one of our Trade Doctors. We offer a reasonably priced service to analyse all your trading data for you and diagnose your trading problems.

The importance of a trading plan

To succeed in the forex market, you will need to build a business. Unfortunately, when people hear that, they get worried that it will be a lot of work. Trading is a business, and you wouldn’t start a business without a business plan. In fact, those who do start a business without a plan are statistically more likely to fail. Trading is already incredibly difficult, why would anyone start something already prone to failure without a plan? It just doesn’t make sense. What is a Forex Trading Plan? It should be said that trading plans written for the forex market follow the same principals as any other financial trading plan. A trading plan contains specific trading instructions. It answers questions like:

• When to trade?
• What market to trade?
• How much to risk per trade?
• How to enter into a trade?
• When to exit a trade?
• What indicators to use when analysing a trade?
• What timeframe to trade on?
• When not to trade?
• The maximum number of trades allowed per day, per week, per month
• Maximum loss rules that tell you when to stop trading at very specific points

The creation of a Forex Trading Plan

To start, you need to figure out what your trading frequency is. If you are a scalper, you likely be looking at trading sessions, like the European open, or the New York Open. If you are the type of trader that takes 1 or 2 trades per day, you’ll likely be working with a 24 hour plan, if you take 1-4 trades per week, your plan may span 1 week. It’s unlikely to be looking at 1 month as that is more of an investors time horizon versus an active trader. After you’ve established what type of trader you are, the next step is to establish a boundary or limitation to your trading plan. A good rule of thumb is to look at the total amount of winning trades versus all your trades in one day and multiply that number by 1.20. For example, if you place an average of 20 trades per day and you only win 6 of them, you should limit your trading frequency to 7 trades per day. This is calculated by multiplying your winning trades by 1.20 and is an acceptable and recognized method to calculate the maximum number of trades that should be placed in one day.

Less opportunities means less trading costs

People don’t like to hear the words “less opportunities” in any context but this shouldn’t be seen as a negative when it comes to trading. Since every opportunity in trading can be a win or a loss, we need to be very selective when choosing to trade an opportunity. When you’re operating within a limit, you tend to be more selective with the number of trades you take in any given day. You will analyse every trade much closer and be more thorough in your analysis.

Boring trading is great trading – preparing the forex trading plan

By limiting the number of trades you can take in any given session, you also limit the number of emotional trades as those don’t fit within your plan. It is said emotional trades are often the primary reason most traders lose money in general. Any plan that avoids the possibility of those disastrous trades should be applied vigilantly.

When to enter a trade – entry signals

New traders open a chart, analyse the market quickly and jump in right away in fear of missing any additional upside. The fear of missing an opportunity is what drives the newbie to behave this way and is completely normal behavior as a human being. The trick is to realize that the market will provide many many many opportunities and you never need to take a trade without a confirmation. Will you enter on the break of the previous high? Will you enter 5 pips higher than the higher time frames resistance? Will you enter after an inside bar break? Every forex trading plan should be objectively clear. The goal is to remove as much subjectivity as possible to avoid bringing judgement into the trade and thus emotions.

Exit signals

As with entry signals, when to exit a trade is just as important. Will you exit half your position at one time the current ATR and the remaining 50% at the 100% Fibonacci level? Most people can predict where a market will go next with a reasonable amount of accuracy. In trading, that is not the problem, the problem most difficult to solve is when do you take your profits and when do you accept you’ve made a bad call and cut your losses? Entry and exit signals will help you remain objective and will also help you accumulate statistics during back testing as the objective nature of your plan can be tested without any capital at risk – that’s how the pros do it.

Trading With A Demo Account

A demo account is a trader’s best friend. Seriously, you should be spending a great deal of time with your preferred demo account, trading and back testing. If you can’t be profitable consistently in a demo account, why would you open a live trading account?

Wrapping it all together

Traders lose money because they don’t invest the required time to learn the business. Most new traders are excited by the prospect of sitting on a beach and trading for millions and don’t bother learning from real professionals and fall prey to overpriced trading courses.

As human beings, we are not built to be naturally great traders and this requires us to rewire the way we think and approach trading. The statistics are so discouraging in trading and this is due to low barriers to entry for novice traders and excessive leverage availability by brokers around the world. There is no lack of education on day trading, simply the lack of effort taken to learn the material and put in the work to really master the skills.

Trading plans are an excellent way of creating a strategic business plan that keeps someone in check and objective in a highly subjective and emotional endeavor – day trading. Once you have created a very specific and crystal clear trading plan, you now need to back test this plan to see what the results would have been over the past 6 months. The goal is to accumulate 100 trades, if you can go back in time and see how your trading strategy would have performed in the past. While past performance is not indicative of future performance, it’s the best thing you have since time travel has not been invented yet.

I suggest using a platform like Metatrader 4 or MT4 and going back 1-2 years on your specific trading instrument, say Gold for example. You can then click on the F12 key on your keyboard and it will move the chart by 1 candlestick into the future. Once you have a trade setup, you approach the trade as you would in real time, stalking the trade setup, timing the entry, and exiting the trade when the plan says you should. You need to enter each trade in a spreadsheet trade journal to tabulate your results. Despite how manual this process may be, it is the most effective and thorough way of testing your trading plan.