The Top Six (6) Reasons Forex Traders Fail

 

Forex currencies don’t reward gambling, on the contrary, the Forex market tends to punish gamblers without mercy. At least the casino will offer a free drink. Trading success requires many years of endeavors and sacrifices in order to build several skills, but most importantly to build an independent and fearless personality which is based on discipline, patience, and self-awareness. Despite the prevailing public perception, Forex is not the palace of gambling.

Although the significant advantages the currency market has to offer, most Forex traders fail. Many of the reasons that Forex traders fail are similar to those that many people fail in their life. Greed, fear, lack of discipline, not following their own rules, and inability to do what is right when the time comes.

These are the top six (6) reasons Forex traders fail:

 

(1) Lack of a Trading Plan

The existence of a detailed trading plan is at the core of long-term trading success. The importance of a trading plan will be highlighted in the worst trading days.

A trading plan must include:

Trading Process

1. Define the financial assets that you should focus on, according to your particular skills and to your past performance. (D.3)
2. Create a detailed description of a Potential Profitable Trade
3. Set your Entry Rules
4. Set your Exit Rules (Stop-loss, take profit, time)

Risk Management Rules

1. How much of your portfolio should you risk in a single trade position?
2. How much can you afford to lose in a single day/week/month/year?
3. Are there any strong correlations between the assets you trade?

Expected ROI (Return on Investment)

1. What are our Profit Targets?
2. What is your minimum Reward/Risk ratio?

Keeping Detailed Records

1. What is your actual performance monthly / annually?
2. How do you perform during certain months of the year?
3. How do you perform on different asset classes and on individual assets?

 

(2) False Money Management

False money management is the most common reason Forex traders fail. The importance of effective money management will be seen when the market conditions change and volatility booms. The inability to cope with such market dynamics will prove a disaster for a trading account. Successful traders know exactly how much of their funds is at risk at any given time. Furthermore, they apply techniques to cope with any market conditions.

These are the key components of effective money management:

1. Diversification among different strategies (high-risk, medium-risk, and low-risk strategies)
2. Segmentation of the available capital in different accounts, where each account is implying different strategies (high-risk, medium-risk, and low-risk strategies)
3. Setting a maximum risk exposure per trade (usually 1-3%)
4. Setting a maximum trading loss per day/week/month
5. Avoiding high correlations between different Forex pairs (i.e. EURUSD and GBPUSD)
6. Re-adjusting position sizes according to any new market conditions and increased volatility

 

(3) Extreme Use of Capital Leverage –Forex is Not the ‘El-Dorado’

Many Forex traders see the Foreign Exchange market as the modern ‘El Dorado’ where you can become rich in a matter of months. The only thing you have to do is to pick the right trades, and money will flow. That approach drives those traders to become extremely risky and anxious to achieve long-term goals in short periods of time. In other words, their greed leads them to use high-capital leverage, up to 100:1, or even higher. But there is a good reason why professional traders leverage their funds up to 5:1, and not up to 100:1.

A common reason for the failure of traders is that they are undercapitalized in relation to their position sizes. If you trade for six months using leverage 100:1 there is a 90% probability that you will lose your entire capital, no matter how good you are in picking trades. This percentage (90%) is based on real statistics of retail traders.

Furthermore, it is very important for all traders to realize that using high capital leverage they are exposed to high-risk but also to high transaction costs. The higher the use of capital leverage, the higher gets the cost as a percentage of the entire capital.

 

(4) Lack of Discipline

Not everyone is suitable for becoming a Forex trader. As it was mentioned before, you need an effective trading plan and a working strategy but most importantly you need the discipline to implement them both with precision and emotional control.

Trading success requires many years of endeavors, not a few months. If you plan to trade currencies and become rich in a matter of months you are in the wrong industry.

 

(5) Not Adapting to the New Market Conditions

Economics is a social science that is based more on human psychology than on mathematics. In physics, no matter how many times you conduct an experiment the results will be identical. In economics, and especially as concerns the financial trading, the same experiment can have completely differentiated results.

As the market conditions continuously change, new opportunities and risks emerge. Traders who are unable to understand the new market conditions will fail in the long-run. Successful traders adapt instantly to any market changes and modify their strategies in order to confront the new risks emerging from those changes.

These changes may include:

• Financial crisis
• New political conditions
• Interest rate hikes
• Major strategic shifts in the macroeconomic environment
• Technological breakthroughs
• Civil unrest

What Traders must do:

1. Diversifying their Portfolios in multiple ways
2. Accepting the fact that there is not such a thing as a system that works always
3. Adjusting their position sizes to adapt to any new market conditions and especially as concerns extreme market volatility
4. Keeping an eye on signs of upcoming market volatility (inter-banking spreads, volatility indexes as the Vix, etc.)
5. Hedging their large positions, especially during high-volatility periods
6. Learning to use the trial and error method, and learning from their mistakes
7. Avoid trading during periods of high market uncertainty
8. Accessing the insights of experienced Forex traders

 

(6) Selecting the Wrong Forex Broker

This is a common mistake for all beginners. Selecting the right partners is as important in trading as in any other aspect of our business life. The wrong Forex broker means either you pay too much or your whole capital is at high risk.

What Traders must do:

1. Select only among regulated Forex brokers, situated in developed countries. Avoid brokers maintaining their offices in offshore countries.
2. Avoid new Forex firms
3. Select only among ECN/STP brokers (NDD brokers) that don’t trade against their clients, that means they don’t keep a dealing desk (DD brokers)
4. Never care about any welcome bonus, care about the spreads and the trade commissions you will pay
5. If you plan to trade intraday, compare the spreads but also the slippage between Forex brokers
6. If you plan to trade in the long-term, check and compare the swap rates of many brokers (in certain circumstances the swap rate differentials between Forex brokers can be extreme)
7. Use a rebate plan to reduce your trading cost further (i.e Forex-Rebates.com) 

 

 

Final Thoughts

Although understanding the fundamental principles of macroeconomics and technical analysis is necessary in order to evolve as a successful trader, more traders fail due to their inability to manage their own trading account.

Many of the reasons that Forex traders fail are similar to those that many people fail in their life. Greed, fear, lack of discipline, and inability to do what is right when the time comes. The largest mistake when trading Forex is to let your emotions interact with your trading decisions. The only way to control the impact of your emotions is by implementing a detailed trading plan with discipline.

Forex currencies do not reward gambling, on the contrary, currencies tend to punish gamblers without mercy. Success in trading requires many years of endeavors and sacrifices in order to build several skills but most importantly to build an independent personality that incurs patience and discipline.

Despite the prevailing public perception, Forex is not the palace of gambling, Forex is a real school building real men.

 

■ The Top Six (6) Reasons Forex Traders Fail

George Protonotarios, Financial Analyst » George at Linkedin

Forex-Rebates.com (c)