Who hasn’t dreamt of trading on a laptop from their holiday home by the coast? All great ventures begin with a dream, and yes, it is possible to succeed. But the journey to becoming a successful forex trader is one of the most challenging adventures one can undertake.
Beginner forex traders commonly fail because they use excessive leverage. Other common causes of failure include:
- Lack of knowledge
- Poor money management
- Doubling down on losing trade
- Inconsistent strategy execution
In this post, you’ll learn why many traders find forex trading so challenging. How they fail and how they get sucked into common fatal situations.
Lack Of Knowledge
Placing a trade, pulling the trigger if you like is the easy part. The hard part, the bit you don’t see, is the preparation and knowledge a good trader brings to each trade. Knowing your game is super important. If you don’t know your game, you don’t have an edge, and that’s called flipping a coin.
As a beginner, specializing is a great way to narrow down the field and become a master.
Picking a forex pair and learning as much as you can about how the pair trade. If the fundamentals are your thing, learn all the important relationships that affect them. Drill into the country’s economic numbers, its politics, geopolitical developments on the horizon. In other words, own it.
If technicals are your bag, learn all you can. The internet is your best teacher. You won’t need a high-priced mentor, everything you need is there, and it’s free.
Your forex success is directly correlated to your trading knowledge.
Most traders don’t trade using all their own money, they put up just part of the money, and the broker loans the balance. If the trade is held overnight, the broker charges interest. Some forex pairs require the trader to put up as little as 5%, that’s 95% leverage.
The magic of leverage can turn a small pile of cash into a big pile of cash very quickly. But there’s a sting, you’ve guessed it. Leverage works both ways. When a leveraged trade goes against a trader, the account balance is eaten up quickly.
To avoid turning leverage into an enemy, it is best to use the correct position. I assume every trade is going to go against me, which focuses the mind on my position size.
Poor Money Management
Successful traders will tell you their number goal is “Money management.” Protect your capital even at the cost of a potential profit. Without capital, you can’t trade, and your journey is over.
Most pro traders will agree, take care of money management, and the profits will take care of themselves.
But what is money management? The concept of managing your money is simple to grasp. The execution, however, is a ton harder. A good management plan means deciding on an exit strategy before entering the trade, not when you’re in the trade.
Knowing where to exit a trade when you get it wrong means, you’ll know your possible $ risk before entry. Likewise, deciding on an exit price if the trade moves your way is important too. This allows the trader to understand the possible $ loss to the possible $ gain. It’s known as a risk to reward ratio (R:R).
A good risk to reward ratio is somewhere between three and five. The magic of maintaining a good risk-reward ratio means you can be wrong as many as six trades in 10 and still come out making a small profit.
A good pro forex trader will likely have a 6 in 10 success rate. So, although a 60% success rate may appear like a poor grade, it’s just the opposite.
However, achieving these results is a lot harder than it looks on screen. Psychology has a habit of getting in the way. A common mistake among many pro and beginner traders is pulling the lever on a winning trade too early and missing out on the multiple.
A profit is a profit. Sure, but remember that ratio, when the losing trades come along, and they will, the fat from the five baggers are needed to carry the day.
Psychology Failure – Doubling Down On Losing Trade
Nobody likes losing. It tastes like S**t! But in the forex trading business, it is all part of and must be embraced. Losing is baked into the risk-reward ratio, and provided the trader sticks to the plan. The profits will begin to accumulate.
Many traders take a losing trade personally like the market pulled a fast one on them. This mentality is understandable, especially if you’re losing trades consecutively. The market is out to get me, right!
Being human, we want payback, that’s usually expressed by doubling down on a losing trade. Doubling down, as you know, is a terrible idea. A new trader may get lucky, but eventually, that type of mentality will blow out the account.
Overtrading is common among all traders. It depends on a trader’s trading style. Sometimes the markets are quiet, there’s no real news flow or technical setup worth risking. Doing nothing is difficult (idle hands, devil’s work, and all that). It’s a ton harder than most of us think.
Opening a trade is just so easy, and when we’re not in the market, we feel we’re missing out. That’s where a trading plan and a hefty dose of discipline come into play.
Deferring to a driver’s manual means, you can’t justify trades that meet the criteria.
Inconsistent Strategy Application
All traders need to develop a trading plan, and better if it’s written down, more for psychological reasons, as your plan should be so easy to follow, a 5-year-old kid could execute it. Working out your strategy ahead of trading means you have a road map, you already ran the numbers, you know the markers you need to hit to reach your trading goal.
Diverting from the plan is what catches a ton of beginners out. Updating or revising your trading plan is cool but not on the fly.
Common excuses for diverting from a plan:
- Though there was even more in it
- it looked like it was losing
- Didn’t want to lose my profit
- Thought I could make the loss back
- Looked like a sure thing, so I added to position
- Got impatiente, so closed it out
The trading plan is a tried and tested way to keep a trader on the correct path. Diverting from the plan means you’ll likely miss your destination.
You may find the following posts useful:
Why do I always lose at forex?