Deemed the world’s largest financial market and trading more than $5trn in volume per day, the global forex market is a force to be reckoned with. Its competitive nature continues to attract new traders every day, ranging from experienced professionals to people with little to no experience.
However, it is a challenging skill to master, and the majority of traders end up losing money.
That’s why, in this article, we are going to take you through:
- How and why forex traders lose money
- How to avoid losing money on forex trading
- Tips to help you succeed and avoid potential losses
Why Do Most Traders Fail?
Before we take a look at how to avoid losses, it’s important to first understand why traders lose money.
The most commons ways most forex traders lose money include:
1. Lack of Knowledge
Trading is something that doesn't have a barrier to entry, unlike the majority of highly skilled professions. If you want to trade, you simply open a trading account, but so many people will begin their trading journey without the required knowledge to succeed.
2. No Defined Edge
Another critical part of trading and trading well is having an edge. Do you have a statistical edge in the markets? If not, then you will lose money
3. Lack of Preparation
Preparation is key. A trader can have the best strategy in the world that is hugely profitable, but without the correct preparation each day/week/month, it sets the trader up to lose in the long run
4. Trading Psychology
I'm sure you know that having the correct psychology in the markets is the most essential part of trading, but it is also the most difficult to master. There are many pitfalls to not having the right psychology when trading, don't get caught out, make sure you have the right mentality going into the markets each and every day.
5. Not Understanding Trading Fees
Trading fees can be a big deal. Yes, a lot of brokers have minimised these fees now due to the competition in the industry. However, if you aren't aware of them, you can get caught out, and it will eat into your profitability. Trading is a business, and to run your business well, you need to understand all of your outgoings and budget for them.
Tips To Avoid Losses
Now that we understand how and why traders lose money, let's go through some basic ground rules and tips to avoid losses in forex.
1. Learn as much as possible
Before you even think about trading, try and gain as much knowledge as you can about the markets you are trading and any factors that may impact you. Knowledge is power.
2. Backtest and journal your results
The only way you can document if you have a statistical edge over the markets is by testing your trading plan over hundreds of trades to see if they are consistently profitable. When you do journal the trades, take down as much detail as possible, such as risk-reward ratio, time and days of entries, how much the trade went for and against you etc.
3. Have a set routine
There is nothing more annoying than being on the losing end of a trade because you didn't prepare correctly. Set out your daily trading routine and stick to it religiously. Having a disciplined schedule is just as important as being a disciplined trader.
4. Work on your psychology
The journey to profitability is exceptionally challenging. Make sure you understand and work on (if needed) the psychology you need to make it in the industry. It will be an extremely tough ride, but worth it if you can become a profitable trader.
5. Find a reputable broker
his may seem simple, but it's not. There are a lot of scams out there, and it is paramount you don't fall into their trap as you may not get your money back once deposited. Check out our forex broker reviews here to find a reputable broker.
Forex Trading Tips
As we’ve just explained, the majority of traders lose money on Forex. To help combat this, we’ve outlined five simple tips you can use to help avoid these preventable losses.
1. Treat Trading as a Business
Traders must remember that forex trading is a business. Like any business, traders are likely to run into losses and profits. Therefore, it is essential not to consider a loss to be a significant setback. Just take it as a bad day at the office and focus on the long-term performance instead.
2. Understand Tax Implications
Regardless of your location, when you engage in forex trading, and if you are profitable, you are bound to be taxed by your government. If you are not aware of how the government taxes forex traders, you might be surprised by how much you can lose in taxes. Therefore, you need to become knowledgeable in the tax law of your country.
3. Keep a Trading Journal
Successful traders keep good records of their trading history. Records that traders should keep include their performance, losses, profits, instruments and activity dates. These records could prove invaluable in the future.
4. Start Small
The first stage in the life of a trader is practice trading. This is trading using a demo account to learn the rules, strategies and other trading tips. After learning the ropes, the trader then switches to live trading with real money. During the trader's early days trading with real money, it's advisable to start small as there will be psychological changes to trading with real money.
5. Manage Risk
As a business, trading comes with risks. You must use tools such as stop-losses to help you manage risk. One way to ensure you keep your trading capital intact is to think of yourself more as a risk manager than a trader.
The Bottom Line
Trading is not easy. Something that has the potential to be lucrative will always come with severe challenges, and you will be continuously tested in the markets. Not even hard work alone will cut it in this game.
However, if you stick to some of the tips mentioned and really give it everything you have got, then there is no reason why you can't make it into a lucrative career.
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