Trading for a living is possible, but the journey is long and complex. It takes time to learn the craft. Trading, like any skill, needs to be practiced a lot. But the more you practice, the better you’ll get. I know that’s not easy to read. Every trader loses heart and wonders if trading is even possible. It is perseverance.
Forex traders commonly lose because they fail to maintain correct position sizing. Other common causes include:
- Lack of knowledge
- Poor money management
- Inconsistent strategy
- Psychology breakdown
In this post, you’ll learn more about why most traders fail. I’ll share my trading struggles and how I succeeded.
I don’t need to tell you trading is difficult. It is, and that’s why most beginner traders fail, through in the towel, and leave never to return. Only the genuinely tenacious stay the course because the journey may take years to hone.
Let’s take a look now in a little more detail as to why traders fail.
Incorrect Position sizing
This is the most common killer of a beginner trader account. Position sizing is as its name suggests. It’s the size of the position the trader takes relative to the account size.
Many but not all professional traders will risk no more than 2% of their account on any one trade. The trader estimates the potential downside of the trade before entering. The trader will then adjust the sizing so that the potential loss is no more than the aforementioned two percent.
Leverage is a wonderful tool, but it can also bite too when used excessively. Losing trades is all part of trading and so maintaining proper position sizing is mission-critical.
This is one of the first important skills to nail.
Lack Of Knowledge
Knowledge is power. Cheesy, but it’s true. If you understand the forex pair, you are trading. You’ll already have an edge on a good chunk of market participants.
That said, knowing the forex pair you are trading isn’t the only way to trade.
Trades fit into one of three camps, fundamental, technical, or a mix of both. You will need to choose which camp you want to belong to and own it.
Fundamental analysis – You have a solid understanding of all the forces that affect the currency pair you are trading. You know the kind of stuff, inflation rates, GDP growth rates, unemployment rates, geo-political forces at play.
You have a deep understanding of what data moves the needle on your pair and you are aware of important data release dates like interest rates decisions etc.
Technical analysis – Pure techies believe they don’t need to understand the fundamentals as they buy into the idea that the market is efficient. This means all the information that affects the forex pair is known by the market participants, and therefore all the fundamentals are represented in the price and how the price moves.
Techies look at charts, study candle shapes, Elliott wave theory, Pivot points, Fibonacci……etc. Tech analysis covers a lot of ground, many practitioners don’t understand or use every indicator, and that’s cool. Plenty of successful techies specialize in just a small selection and make out like bandits.
A mix of both – Many traders, as I do, gain an understanding of forex pair fundamentals. This allows the trader to form a mental model. The model helps the trader form a bias, i.e., prefer the long or short side.
With a direction picked, next comes the charts. The charts help the trader choose an entry and an exit. Importantly they also help the trader form a strategy for exiting if the position moves against them.
I have tried both fundamental and technical in isolation without success. I found success when I combined both. But you need to follow your own path. What’s correct for me may not be for you. You need to experiment, get to know what type of trader you are.
Poor Money Management
All traders need to learn some basic money management skills. You’ve already learned one of them. Position sizing and how incorrect sizing and leverage spell disaster for a trading account.
Money management is simple – “Don’t Lose Money.” Not very helpful, right? Well, the sentiment is correct. I learned a lesson. Eventually, I realized my number one job as a trader is not to trade but instead to protect my account from as much risk as possible.
Risk and reward are other important lessons all traders need to execute. The risk-reward is, as you know, the relationship between the potential gain and loss a trader can make on a trade. It’s derived by dividing the potential gain by the potential loss.
A three to one or better is the sweet spot. Maintaining a proper R:R ratio is what adds fat to a trader’s account.
Even good traders struggle to hit a 60% success rate. That means only 6 out of every ten trades are successful. Maintaining a three to one minimum is, therefore, crucial. The winning trades must be sufficient to cover the four losing trades. Make sense?
As said, losing trades is part of trading, and a trader knows over a larger number of trades.
Inconsistent Or No Strategy
A trader develops a strategy that suits their character and lifestyle. Success is crucial to trading in sync with your character.
We are all unique, while one trader may love screen time, thrives on fast action, has an ability to think quickly. The next trader may dislike charts, doesn’t like pressure decisions, and prefers to consider the big picture.
It’s important to know what type of trader you are. After you decide on a broad trading style, you’ll need to focus on a solid strategy that makes sense to you.
That’s the beginning of a trading plan, and the plan is a trader’s road map to success. The plan will evolve over time as you learn more about how you trade. A diary of trades taken and why helps speed up the process of building the road map.
As the plan develops, this is your plan and style of trading and should be followed. Having and executing a trading plan ensures you don’t skip from one strategy to another. Doing so is a common traders pitfall, far away grass, etc.
Trading Messes With Your Head
Two basic instincts are at play when trading fear and greed. Greed is what gets us into the trade, and fear takes us out usually.
Fear is the stronger emotion. It has evolved over millions of years to help protect us and is difficult to harness. Fear makes us irrational. When fearful, we operate not by rational thought process but instead by instinct.
When a trade goes against a position, it’s uncomfortable. Instinct is screaming, “Close The Position.” Beginner traders often succumb to the instinct, going against their trading plan, costing them winning trades and reducing their risk-reward ratio.
Greed is what gets us into a trade. It’s frustrating losing a trade. Beginner traders often fall into the trap of thinking the market is out to get them, and they decide to fight back by doubling down on a losing trade. This never ends well.
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