5 Reasons Why Most Forex Traders Lose Money

Time and time again, much of the trading literature suggests over 95% of forex traders lose money. Despite that there hasn’t been an all-encompassing study surveying all the millions of traders in the world to quantify this figure, most analysts still agree with it nonetheless.

It makes one wonder if there are any human variables contributing to this staggeringly high failure rate. This article will cover 5 of the most common reasons why most forex traders lose money.

1. Risking too much

The amount of risk a trader takes in relation to their total equity has a massive bearing on trading outcomes. If one risks a conservative percentage on any individual position, they are far less likely to blow their account. 

Conversely, risking something like 20% or higher on one trade is suicidal and is bound to induce substantial emotional attachment to that trade. The rationale for this high-risk behavior boils down to greed and feeling invincible.

Traders prone to this behavior may have above-average analytical skills to make solid trading decisions, but they let themselves down by risking far too much. If we appreciate drawdowns occur in any market, it stands to reason a losing streak is unavoidable. 

No matter how good a set-up might appear based on technical evidence, there is always a chance of it failing. By risking too much, a trader voluntarily reduces their longevity in the game. 

Suppose they are wiped out by 30%, for instance. In that case, the recovery back to their initial starting point is arduous, making them vulnerable to continue taking substantial risks, over-trading, changing their strategy, or giving up altogether.

Overall, the dilemma of risking too much shows a severe lack of risk or money management.

2. Not using a stop loss 

This reason is an extension of the previous one as both are interlinked. Most consistently losing traders will experience several blow-ups consecutively or lose substantial amounts on one given trade.

Even though the latter results from risking too much, the primary reason often is having no stop in place. However, a relatively small position can eventually become a large running losing trade without a stop loss. 

Most losing traders are arrogant and possess a mentality of superiority. They will probably also see stops as their enemy because of the markets or their broker.  When they make mistakes, very few initially take the blame and own up to looking for solutions.

Unfortunately, it is through these elements where we can easily see part of the causes of why the high failure is high.

3. Searching for the ‘Holy Grail’

A Holy Grail is the belief some traders have that a trading strategy with no losses exists. Unfortunately, not even the best in the world with decades of experience can confidently claim a way to trade the markets without losing.

Having this mentality can keep someone in a cycle of hopping from one system to the next constantly when encountering any form of challenges and losing periods. If a trader keeps changing strategies, it can add more years before a trader’s aha moment over time.

Losing traders generally do not think in probabilities but rather in certainties, which is counter-productive. 

Searching for something that works all the time is impossible. It’s human nature to search for perfection. However, in trading, faultlessness is unnecessary, nor is there a need to prove oneself to be right or wrong.

4. Being impatient 

Patience is one of the make-or-break qualities any successful trader should have. This character trait comes in two forms, the patience of mastering the craft and, more pertinently, the patience behind executing positions.

Most traders who lose money don’t necessarily study why they’re losing as they have not conjured up enough time to understand the craft. This lack of observation is due to impatience. Many underestimate that trading is a skill that can take several years to master.

The second aspect of the patience argument boils down to making actual trades. A losing trader is likely to overtrade, and rarely will they stick to their trading plan. Patience is about the waiting period between one’s last trade and the one they will take in the future.

This waiting period can be a few hours, one day, or a week depending on the trading style. Having a lack of patience makes a trader vulnerable to over-trading and taking sub-par positions for the sake of trading.

5. Having unrealistic expectations

Unrealistic expectations result in all the previous results of risking too much and lacking patience. Unfortunately, the introduction of most financial markets to newbies is often monetary-driven, with little regard to the risks and amount of effort involved.

Many losing traders concern themselves more with doubling or tripling their accounts quickly rather than consistent gains. Granted, it certainly is possible to substantially increase one’s trading account in one position, though there are too many variables working against the likelihood of it happening.

For every trader that pulls it off, 100 will get devastating results. Therefore, it is more of an anomaly than an everyday occurrence. Losing traders fail to appreciate this because they naturally have a gambling mentality and don’t see trading a financial market as a business.

Also, another part of having unrealistic expectations is most losing traders are severely under-capitalized. They will probably expect to make a living off a small account or take substantially larger positions off it, actions that are a recipe for disaster.

Final word

A common thread for all the reasons listed above is they all stem from human error rather than technicalities beyond a trader’s control. In reality, prices can go only in two directions. So, theoretically, the number of winners should be at least 50%. 

Unfortunately, this is not the case as, ultimately, we can be our own worst enemy. As the late great Zig Ziglar once said, ‘The first step in solving a problem is to recognize that it does exist’ The challenges most traders face leading to the alarming failure rate are more human than they are technical.