Why Do Most Forex Traders Lose Money?

By Nial Fuller in Forex Trading Articles on March 1st, 2011 | 50 Comments

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Statistically speaking, trading the Forex market with a 1:1 risk reward ratio and no strategy or trading edge has a 50% chance of success (minus fees) over a long series of trades. Thus, most traders should approximately breakeven over the long run because trading with a (truly) random entry and a 1:1 risk reward is analogous to a random coin toss.
Why do most Forex traders lose money then? What human variables contribute to the success rate being much lower than breakeven for most traders?
Perhaps the main reason most traders lose money is because the majority of people have little self-control and cannot resist the temptation to over-trade and over-leverage when there is no one to be accountable to. Another main reason most traders lose money is because they try to buck the trend for some reason, even though they KNOW they have a statistically higher chance of winning by sticking with the trend until it is clearly finished. In this article I will share with you my thoughts on why otherwise totally rational and successful people fall apart when it comes to trading the Forex market.
• Not accepting responsibility for losses and mistakes
As human beings we all have a tendency to pass the blame and find fault elsewhere. However, when you are trading badly, it is your fault and no one else’s. If you find you are losing money in the markets it is not your broker’s fault, nor is it the result of a bad quote, a bad tip, or a hardware failure. There is no mysterious “They” out to get you or steal your money from you. Everything that happens to you in the market, good or bad, is ultimately your fault; blaming anyone else or thing is not going to help you become a successful trader.
Accepting responsibility for your losses and trading mistakes is paramount to turning your trading around. If you use a “tip” or a piece of advice from a broker or from someone else, and you lose money as a result, it’s your fault for listening to them; at least the second time around. The first step in any self-help group like Alcoholics Anonymous is admitting you are the problem and that you have a problem. If you continually blame other people or things for your trading losses, you will never improve your trading because you won’t feel any need to correct your weaknesses if you don’t believe you have any. So, a big reason many traders fail to make money is because they won’t admit they are to blame for their losses. If you want to improve your trading you need to take full responsibility and go into Forex traders’ rehab.
• Over-trading and not trading higher time frames
One thing that definitely prevents most traders from making money in the market is over-trading. Traders who just jump in and out of the market on emotion and greed, will not only suffer many more losing trades, but they will also rack up a lot more fees via spreads and (or) commissions over the course of a year than traders who stick to the higher time frames and understand the value of self discipline and having patience. Trading lower time frames causes many traders to over-trade because they end up thinking they see many more trading signals worth trading, when in reality there is just a lot more “junk” signals and “noise” on lower time frames.
So, if you are currently losing money on a consistent basis and you are trading lower time frames, you will definitely benefit by switching to higher time frame Forex trading.
• Risking too much
How many times have you won a few trades in a row, made some money, and then given it all back quicker than you made it? This happens all too often for traders who have not yet learned to risk the same amount every trade or who have not yet learned to manage their emotions effectively. Trading should not be viewed or treated as gambling, you don’t want to “double down” just because you are up some money. That is not how it works. You have to stop and ask yourself, “Are you a Forex Trader or Gambler?”
As price action traders, our aim is to “master” our trading strategy to the point of knowing exactly what we are looking for in the market every time we sit down behind our computer screen. However, just because you know exactly WHAT you are looking for in the market, this does NOT mean that it WILL work out. Price action trading gives you an “edge”, just like any other method does (although price action is clearly the best way to trade), and what you need to understand is that no matter what your edge is, it’s not going to work out in your favor EVERY time, and you don’t know for sure if any single edge-event will work out.
So, if you are equally confident in every trade you take, because you have mastered price action trading, there really is no reason to risk substantially more or less on any single trade. You want to keep your risk amount approximately constant relative to your total account value. The only time you should increase your risk per trade is if your account value increases, never increase risk per trade just because you feel “totally certain” that THIS trade will work out, because as we discussed above, YOU DON’T KNOW if it will or not.
• Poor Forex trade management / no trade management
If there is one single thing that most traders do wrong who lose money on a consistent basis, it is poor trade management. Every trader knows after a little practice and education on a high-probability trading method like price action, they can pick near-term market direction with pretty good accuracy, at least enough to get into open profit. This is not the hard part of trading. The hard part comes after you enter a trade. Most traders have no forex trade management plan, either because they don’t understand trade management, or don’t think they need to do it. What these traders don’t understand is that they are sabotaging their own effort and potential skill as a trader by thinking they will somehow behave more logically and effectively AFTER entering a trade than BEFORE. This is just ridiculous. No human being on Earth will be more objective or less emotional than they will be when there money is NOT on the line. It’s a fact of human psychology that when something you care about (money, relationship, etc) is at risk, you become more emotional. Everyone knows this. So, if you are guilty of not managing your trades BEFORE entering them, accept responsibility right now and start changing it.
A related topic here is having a Forex trading plan. Your trade management plan should just be one part of your overall Forex trading plan. If you don’t have a written down plan of attack on how you will trade the markets, you are probably going to go nowhere fast. Your trading plan should also include a Forex trading journal.
• Entering randomly / not mastering a proven method
Traders who don’t have a definable and “mastered” trading method are hurting themselves because they essentially have no trading edge and are just shooting in the dark, so to speak. When you learn one effective trading strategy like price action, and truly master one Forex trading strategy at a time, you will largely eliminate the problem of fear and second guessing your own trades. The key here is that you REALLY NEED TO MASTER an effective trading strategy, like price action. Most aspiring traders just jump around from one trading strategy or system to the next, never really giving one enough time to truly master it. So, the first thing is that you need a truly effective trading strategy, and then you have to give it enough time to truly master it.
Human beings have a tendency to see patterns that don’t really mean anything. This is especially true in trading; if you stare at a chart long enough you can make up all kinds of things that “should” happen based on what you “see”. The bottom line is that price action strategies really do give you the edge you need, so that you aren’t guilty of “manifesting” irrelevant patters in the market, but you HAVE to put in the time and get the education required to master them.
• Unrealistic expectations
Finally, one thing that is definitely common to all traders who are losing money in the markets is that they have unrealistic expectations. If you have $500 to trade with, there is no way on Earth you are going to be able to live off your trading. You have to take into consideration what you can REALISTICALLY expect to make each month or week, given the amount of money you have to trade with. This is assuming you will commit to effective Forex money management, because if you are properly managing your risk on every single trade, there is just no way you can make enough money to live on if you don’t already have a lot of money to trade with.
This doesn’t mean you can’t be a successful trader however. Being a successful trader means you are consistently making money in the markets. If you have a small trading account but are making consistent profits that are in-line with your small account, then you ARE a successful trader. The same habits that make a trader successful on a small account are the SAME habits of successful traders of large accounts. Remember that. Forex trading success is not measured by whether or not you get-rich-quick, it is measured by your consistency, and the only way you can become consistent is if your expectations are in-line with the reality of your current financial situation and the reality of the markets.