5 factors why 95% of forex traders fail
The popularity of forex trading has really skyrocketed in the past few years and the reason why is because of the easy accessibility to enter the FX market for ordinary investors. But it is said that the failure rate of aspiring forex traders is very high, with more than 95% of traders expected to drop out of the game within their first few years of trading.
Here are 5 most common mistakes that most of those failing 95% of the traders make. Get to know them so you can avoid them and increase your chances of survival and success.
Mistake 1 - They don’t listen to the market.
Acquiring the necessary trading skills is the easy part, but if you are unable to apply these in the proper context, your skills alone will not generate your desired profits. At the end of the day, it is still the market that will dictate price action so traders who regularly disregard what the market is telling them often end up failing.
For instance, if you insist on shorting EUR/USD even when new fundamental factors arise and buyers have already taken the pair to new highs, you might need a moment to step back and reassess the situation. Take some time to figure out if there’s additional information that carries more weight in terms of determining current price action instead of being stubborn and even adding to your position.
Mistake 2 – They don’t have a proper risk management plan
Risk management is not some vague industry lingo – it simply means the knowledge and skill of managing your Forex trading account. As simple as it may seem, it is the key factor to a long and successful trading career. Yet, it is often forgotten or neglected in the thrill of the trade. We would like to take this opportunity to lay out some ground rules by which you can effectively manage your account.
Do not go looking for the Big Win; it will most likely result in a big loss. Successful trading means consistent trading, in other words, in long-term, the sum of small wins is the actual success. Never assume that all your trades will be profitable, and plan on losses.
You should only risk a small percentage of your total account balance on each trade. Simply minimises your risk, then even if you end up losing your entire investment on a trade, it does not have a critical effect on your account balance. The recommended amount is 2% of your account balance per trade. More aggressive traders go as high as 5%, but never higher than that. It is a very important rule to keep, since the lower your account balance drops, the harder it is to rebuild it.
Mistake 3 - They set unrealistic expectations.
It will take a lot of time and ego-crushing losses before one becomes a consistently profitable trader. There are many things that can be done to speed up the learning curve, but there is no way to completely eliminate it.
Some newbie traders make the mistake of thinking that, in order to be successful, they should never incur losses. Consequently, they pressure themselves too much and take it hard every time a trade goes against their way.
To avoid their fate, you have to accept that you will face losses. You will experience losing streaks and undergo drawdowns which will probably make you feel terrible. Whether you like it or not, you will be on the wrong side of a trade in some instances. But you know what? It happens. Even the best forex traders out there still experience these things. As long as you understand why you lost, you have actually gained something – experience! Nevertheless, experience is something that money cannot buy.
Mistake 4 - They'd rather be right than make money.
It is part of human nature to dislike it when we are wrong. This is why so many people have a hard time swallowing their loss, admitting their mistakes, and moving on.
Often in forex, traders develop a bias on a currency. Not that there’s anything wrong with it, but the downfall of this is that sometimes they get paralysed when their trades don’t go as they’ve planned. They stick to their trades, insisting on being right and refusing to exit their already-losing positions.
Commitment is a wonderful thing when it comes to relationships and career but when you trade, you should remember that you shouldn’t be emotionally-invested on a trade. Successful traders know when they should exit a losing position and they are able to do so quickly. Never let your emotions trade for you.
Mistake 5 – lack of education/knowledge
All too often aspiring traders simply dive into the markets without the correct knowledge and education. They don’t understand the mechanisms of the markets properly, nor do they appreciate the mechanisms of the trade and that of course can lead to failure and loss of your capital.
A good education and knowledge is no doubt important to your trading – but the KEY to your trading success is the RIGHT education and RIGHT training. If you want to survive in FX trading and want success and longevity as a trader then it is absolutely necessary that you are on the correct path of knowledge.
To wrap up
Just remember that success in forex trading comes down to listening to the market, having a proper risk management plan and following it, setting realistic expectations, being open to accepting your losing trades and having the correct education and knowledge behind you.