By various estimates, 90% of traders have lost their deposited funds (completely or partially) at least once while trading in Forex. We compiled the most common causes of loss in the currency market. Use it as a check list to see what you’re good at, and what can be improved.
Have you ever lost funds while trading? If the answer is yes, it’s important to find the cause and analyze your trading behavior. This will help avoid losses in the future. So, why do traders lose money?
Reason #1: Lack of knowledge
Perhaps unsurprising, but gaps in trading education (or education in any other area) is a very common cause of failure. Knowledge is necessary even if you prefer copy trading. For example, it’s easier to find the right strategy in the RAMM system if you’re familiar with the nuances of trading: you’ll know how to find someone who trades carefully, not impulsively. This means that investors shouldn’t base their choice not only on the strategy’s performance (profit percentage), but should be able to analyze the strategy’s chart.
Reason #2: Inability to read charts
Have you ever seen stock photos of traders? They typically show a suited individual looking at a screen with complex charts, their expression is that of complete understanding, desperation, or victory (depending on the mood of the photo). If a quick glance at a technical chart makes you want to turn it off immediately, it’s clear that you have to educate yourself at least in the basic indicators. Charts are necessary to build your trading plan based on trends and patterns.
Technical analysis can be learned by studying the recommendations of professionals. The Analytics section on Grand Capital website provides daily reviews of the price movement of relevant instruments, accompanied by charts. Following the analysis of professionals, it’s easier to start using the same indicators to form your own plan and strategy.
Reason #3: Ignoring news
Another common cause behind failure is blind trading. Putting all the trust in charts, sometimes traders don’t think it important to monitor the market situation. However, any algorithm, trend, or strategy won’t show the correct price movement in case of sudden market fluctuations. It’s especially true now, in our eventful time of coronacrisis.
It’s not particularly easy to keep track of everything. Those who employ fundamental analysis daily often trade full time, spending 8–12 hours on trading, including at least 2 on studying economic news. Also, it’s those who don’t trust technical analysis and think that charts can’t accurately predict the price movement of a certain instrument.
The trick is to combine both technical and fundamental types of analysis. And if you don’t want to spend hours on it, there are daily video reviews by our Chief Analyst Vladimir Rojankovski. He picks only the most important news for the most active traders and provides a succinct analysis under 1–2 minutes.
Reason #4: Poor risk management
Forex market is very volatile, and newcomers often don’t know how to manage risks. Even the most seemingly insignificant piece of news can cause a sharp swing in the price of a currency pair. That’s why even the most reliable trading plan can’t always rule out the possibility of failure. To avoid losses, it’s important to shut down your emotions and greed. Don’t invest all your savings in one trade, it’s always smart to diversify. Sitting on a trade for too long, or a premature exit both can result in heavy losses, that’s why risk management is always connected with self-control.
Effective risk management also means you shouldn’t dismiss simple, yet important tools: Stop Loss, Take Profit, hedging, floating leverage. To do this, it’s necessary to choose a suitable account. Grand Capital offers accounts with floating leverage that are based on MetaTrader 4 (ECN Pro) and MetaTrader 5 (MT5). It’s possible to choose between two options when opening a MT5 account: netting or hedging.
Reason #5: Lack of experience
We started with the obvious, let’s finish in a similar vein. Experience is a must: only this way your knowledge will turn into intuitive and automated actions, so you can be confident in every step.
If you want to turn the time you spend in the terminal into a really valuable experience, it’s necessary to work with your own trading data. That’s why many traders keep logs. Trading logs allow finding market shifts and adjusting to them, correcting your trading system in time.
The rule of the thumb is not to invest large amounts of money before you’re confident in your trading system. This means that newbies should practice on the cent account Micro, and only then move to larger sums on a classic Forex account.