There’s a constant reminder for traders about the risks of trading leveraged products.
There’s also a persistent warning intimating that the majority of traders aren’t profitable.
But still, why do most forex traders lose money?
Are they just not heeding to the cautionary advice given to them?
Or is it just impossible to make a profit in a market like the foreign exchange market?
Here, you’ll find some of the top reasons why traders fail to earn consistent income from trading currencies.
1. Thinking that a profitable demo account for a few days equals a profitable real account for years
New traders think that a few profitable but highly leveraged trades on demo make them ready for risking real money.
It’s as though they’re saying that they’ll be “the one” who’ll finally beat the market, but most of them can’t even explain how they exited each trade and their basis for taking them in the first place.
And when they do open a real account, these newbies find that they can’t replicate what they’ve done in the practice account.
And, what’s worse is most of them are wiped out of the market quicker than the duration they were profitable on demo.
Trading with a practice account takes time and consistency.
New traders should even consider demo trading for at least six months as this will ensure that they are more than prepared to begin trading with real money.
2. Using High Leverage
As you know, leverage works in both ways: the probability of making higher profits or equally higher losses. But how do you put that risk of using leverage in perspective?
In a study conducted by the DailyFx team, they were able to find a relationship between profitability and leverage in that the higher the amount of leverage employed decreases the winning percentage of traders.
And they also found a connection between the size of the equity and profitability wherein accounts below $1,000 are less likely to be profitable while accounts above $10,000 are more likely to be profitable.
But leverage isn’t exactly the killer of dreams, but its how traders use it. In fact, traders with a capital exceeding $10k use leverage too, but they are more conservative with it.
The tendency of some inexperienced traders to grow their small accounts quickly through high leverage makes them more susceptible to losses.
3. Impaired Trading Psychology
One thing losing traders can’t accept is losing; that’s why they continually lose.
The trading maxim “cutting your profits short and let your profits run” applies here.
But why can’t traders follow this simple principle?
Well, here are a few possible reasons:
A winning streak can be addictive
With a thirst for consistency, some traders may be inclined to let a losing trade run its course until it somehow turns favorable.
This is because others believe that when consistency is disrupted, the credibility (of a trading system or as traders) is damaged.
It has happened before
When a trade that lingered in negative territory bounced back to the positive side before, traders regard this as a precedent to justify their current losing trades.
However, this isn’t always the case, and plenty of deepening floating losses can inhibit you from taking more positions as they take up more available margin, or worse, take you out of the market altogether.
The misconception that a higher winning percentage is better than profits gained
A trading system with a 30% win rate can also be profitable.
Some traders think that a trading system that wins 90% of the time is ideal, so they strive for consistency.
But the reality is that even if you have a system that loses more than it wins, you can be profitable, and it just depends on the profit targets you set.
Also, if you have a 90% success rate with your strategy, but one trade hampers you with a drawdown of 50%, you have to make a 100% return on your next few trades just to breakeven.
Without stop losses in place, the sunk-cost fallacy could be in full effect, and a lot of traders are victims of this cognitive distortion.
When you’ve already invested a good chunk of time and hope on a losing trade, it’s more difficult to let it go.
But the more you hold on to it, the closer and closer you are to a margin call.
4. Untrustworthy Brokers
It doesn’t matter if your money management techniques are sound; if your emotions are stable or if your trading strategy is profitable, you can’t find success if your broker is working against you.
However, unregulated brokers aren’t the only culprits, although it’s mostly them doing the most financial harm to investors.
Regulated brokers are similarly guilty because, in the past, the well-known ones have defrauded their clients too.
And, definitely, brokers with poor execution that results in subpar pricing and brokers that are insufficiently capitalized that don’t offer much protection to their clients can also be detriments to your trading profits.
Now, in the end, what you must ensure, among everything else, is that you have the right mental makeup for trading. If you’re a little more experienced, you should focus on numbers two and three, the money management and psychology part of the game.
On the other hand, if you’re a complete beginner, focus on number one and number four first. Learn what the demo account can do for you as you gain trading skills. And, study how a reputable broker can help you achieve success.
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