10 Reasons Why Newbie Traders Lose Money in the Forex Market
Are you a new trader trying to gain a foothold in the Forex Market? Are you struggling to make profits in the Forex trading business? Many traders would relate themselves to these questions. As a new trader, you may start trading with lots of positive expectations, but you have a chance of getting confused or rushed in the herd walk resulting in losing out money instead of making profits.
The Foreign exchange market, the largest financial market in the world, allows traders to speculate, buy, sell and exchange currencies. While it gives traders an opportunity to earn huge profits, it also offers the risk of incurring losses. The amount of information on the internet including the price movements, fundamental and technical analysis may attract you to the trading business making it look quite profitable for most of the traders but that is actually not the case. Many traders lose money quite often.There are successful traders as well but success comes to them gradually in long term with experience and practice.
Now that you have read all, as a new trader you might be planning to retreat from trading in the Forex market. But do not change your mind as success will come to you; experience, knowledge, and practice will drive your way to success.
The following 10 reasons of why a new trader is more exposed to losing the entire funds in few days; will help you to understand the process and avoid making the same mistakes. Before getting started as a trader, you must understand the blunders what most of the traders make, as this will help you take calculative steps increasing your probability to be successful.
Trading without knowing the fundamentals
Most often, new traders plunge into trading without knowing about the market resulting in making wrong decisions and incurring losses.
How can you risk your money in a market that works on prospect theory without having any knowledge or training about trading? Before you start trading, it is very essential to know the basics of trading. A new trader should extensively read about the market trends, the scenarios, the way it functions and everything related to the Forex market. Gaining adequate knowledge will help you to make wise and informed decisions on the basis of your personal needs and goals.
New traders should gain some experience by trying out demo account. Demo account works with virtual money and there is no emotional stress involved. Though the real market responses differ to quite an extent from that of the demo account, it is still a good way to gain experience before you enter the actual trading market.
- Improper/ No Trading Plan
A trader should always have a detailed trading plan before they enter into any trade. The trading plan should have entry and exit positions defined, a risk to reward ratio calculated, the choice of a currency pair in which trading would be done and money management strategies.A trading plan will always help you to follow a strategy allowing you to measure its performance and make decisions. A trading plan will always assist you in making thoughtful trading decisions keeping you away from taking emotional decisions. Also, when you make a plan, you should trade based on your plan. Any second thought may completely change your trading activity and may work against your favor.
Trading without or with an inappropriate plan creates odd results. You may win but it will be short term finally ending up in losses.
- Being impatient
New traders often make hasty decisions with the intent to make early profits.However, being impatient will land you nowhere. Remember, Forex trading is not easy; it takes a lot of time and practice to earn big profits. Traders who think of trading shortcuts which can make them affluent and rich are the ones who blow up their funds early.
- Getting anxious with the reverse trade movement
New traders are often anxious or stressed out when they incur losses or the trade moves against them. They either try to recover their losses or exit from the market, both of which are bad decisions.
If you are a new trader and have experienced the movement of trade against you, do not be emotional or tensed; instead, wait for the market to work in your favor. All that you can do is, stop trading for a while till you identify the positive market situation or decrease the size of trading.This will eventually help you withstand the situation, without allowing your emotional responses to take over the situation.
- Trading too much
A new trader may eventually make this mistake thinking that trading more will bring them more opportunities to be rich. However, aggressive trading may result in greater risk towards losses. Trading too much would expose you to losses in bits which may be enough to blow out your funds easily. Besides too much of trading will expose you to take emotional decisions which may spoil your portfolio completely including your confidence.
Therefore, you should always practice trading at a low frequency based on risk to reward ratio calculation and decided position size. Try and enhance the quality of the trades you enter as this will increase the reward to risk ratio and make your trading more profitable.
- No/Improper tracking of trade activity
If you’re new to trading and unable to give adequate time to monitor trading activity, you may take wrong decisions or enter a not so profitable trade, resulting in heavy losses. Therefore, you should always focus on daily trading activity, understand the charts and interpret what will be good and what may result in losses.
Predictions based on conviction do not work in Forex trading. Therefore tracking the activity will help you trade better increasing your chances to succeed.
- Not using the stop loss tool correctly
New traders may find it difficult to use the protective stops correctly or some may even not use it. If you do not use the stop loss tool, you may land up to making heavy losses and blowing up your funds quickly. Using stop loss tool will help you in limiting your losses thus protecting your capital. If a trader uses stop loss he is actually able to control the risk.
Besides, the stop loss should also be placed correctly. If you put a stop loss too early you may end up exiting the trade before it would have headed towards profit making direction.
- Incorrect determination of exit points
Lack of experience and knowledge can compel a new trader in making wrong exit point estimations or not using them at all. Estimating the wrong timeframes will eventually result you in losing out money and this may work both ways, moving out early or moving out late. If you exit too early, you may earn small profits but may lose the chance of earning bigger profits in the winning trade. If you exit late, you may incur losses.
A correct exit strategy should always be put in place as this will help you decide when to exit a trade. If you are aware of the time when the trend you have entered is going to change, you can always take the right move and make an exit without risking your capital.
- Big Position Size
Most often traders set larger position size increasing their risk of losing funds as bigger is the position size larger is the risk. When the position size is big, there is a fear involved both financial and emotional. If you have lost in four trades, and hoping to win in the fifth trade, you are subsequently increasing your position size based on emotional aspect, increasing your risk to lose again. This way your funds may finish soon.
Determining an optimal position size will not only reduce the risk but also allow you to use your funds appropriately in earning profits. You should always determine a position size which even if lost does not affect your life emotionally and financially
- Emotional and Psychological responses
Often new traders make impulsive decisions based on the market trend drifting away from the strategic way of trading, resulting in losses. Often new traders in a hope to earn more money land up doing a lot of trading. Fear of losing money can cause an early exit from a trade that would have earned profits. Traders can blow out their funds completely if they trade emotionally.
While trading Forex, you may encounter several emotions like fear, anxiety, greed or stress. However, if you can overcome your emotions and be unaffected with any negative market situation; you are surely going to survive long term and make profits.
This detailed overview on the causes of failure for beginners in the trading business will surely enlighten all new traders to take strategic decisions and make their trading career a promising one. Now that you know what can hold you back from earning profits; all you need to do is manage your risks wisely and trade strategically.