Why do 90% of forex traders lose money?

If you’ve ever used an online brokerage, you must’ve seen a disclaimer in the footer of their website saying that a large percentage of traders lose money from trading. The percentage can range from 70 to 90, but the portion is still quite significant.

You may have thought that those numbers were overblown, but they are true. Why would a broker post false information that could scare off potential customers?

However, it’s also true that many people come into the market, get burned, and leave, contributing to the percentage of underperforming traders. This article will outline the most common reasons for failure and aims to help traders avoid them.

Coming in underprepared

The simplest and most common reason for failure in the forex market is a woeful lack of preparation. Promoting forex as a get-rich-quick scheme or selling a course that’s sure to make you a pro in a matter of hours exacerbates the issue.

The simple fact is that if it was that easy to earn money with forex, many more people would do it. Traders need to learn the correct terminology, understand how the global market works, understand primary drivers for their currencies, and have healthy information sources. And those are just the basics.

After you understand the gist of trading, you’ll also need to master your platform, start understanding indicators, and use technical and fundamental analyses. To become successful, you’ll need to devote significant time to understanding markets and how they interact, find a proper strategy, utilise your platform’s more complex features, optimise cost structures and accounts, and much more.

Forex trading can be highly lucrative, but it requires effort. The easy-going mindset that most people bring to trading simply doesn’t work. It requires time, active learning, a broad knowledge base, and some creativity. There are no workarounds that bring success in the long term.

Trading on a whim

Building on the previous sentiment, many people believe they can succeed by following their instincts. And once you’ve traded for years, you may develop some sort of trading sense, in that you’ve already internalised a lot of the info needed to analyse a situation properly. But for new traders, this falls into one of two categories.

Riding trends

These traders hop on an existing trend and ride it out, finding success or failing. Success, oddly, is often the worse outcome here, since it gives them an unwarranted confidence. These traders often go on to lose a lot of money due to a conviction in the superiority of their instincts.

Half-blindly guessing trader

The other kind of trader simply goes in based on half-information or personal emotion. They’ll hear a news report or just invest in their favourite car company’s CFD shares. Again, this may bring success temporarily, but only temporarily.

Instincts aren’t a real thing in trading. Top investors have seen so many market situations play out, and have such a deep knowledge pool that they can do some rudimentary analysis which seems instinctual to someone who hasn’t seen all that has come before. But even top investors are unlikely to take on large positions based on that hunch.

Trader that not following a strategy

Some traders put in a certain amount of preparation and come up with an asset list they are satisfied with. They track those assets and if their prep work was good, they may find some success. However, once the assets start displaying irregular behaviour, they become too difficult to keep track of. And in abnormal market conditions, it often proves too difficult for newer traders to regain control.

That’s why a trading strategy that suits you is important. Having at least some course of action prepared for different circumstances is crucial for keeping your cool. Additionally, in most trading strategies, there’s some in-built degree of asset synergy and risk management, which helps keep your portfolio safe.

Trader sticking to a strategy that isn’t working

Conversely, some traders stick to strategies too rigidly. Those who buy into their scams often just mechanically trade according to a strategy, which, of course, doesn’t work in diverse market conditions.

Others simply find a strategy they like and fail to modify it once a market shifts. Trading requires a degree of flexibility, and that flexibility comes from research and a bit of trial and error. Neither trading blindly nor bearing down and following a predetermined routine will yield long-term results.

Switching strategies as soon as you lose

The last common strategy mistake people make is switching as soon as they lose. This comes from false expectations that you’ll be able to come in, start trading, and earn hundreds or even thousands a few days.

When you open a business, you can’t expect your first month to be profitable. When you start learning the guitar, you can’t expect to sound like Hendrix after a few days. Trading, similarly, is a skill that takes time to develop.

It involves trial and error, and sometimes that error can sting and carry uncomfortable financial losses. However, that’s simply part of the process. If you decide to do something entirely different every time you fail, you’ll never come to a deeper understanding. Additionally, switching so often may entail significant portfolio changes, which can be a burden on their own.

However, you may have noticed that this is somewhat at odds with what’s previously mentioned about not overcommitting to strategies. Sadly, finding the balance between not jumping from strategy to strategy and not sticking to just one is tricky. It depends on the trader, the exact strategies, and the market conditions.

The best approach here is to test everything thoroughly on demo accounts.In fact, a demo account can be opened here with IronFX. Practicing on a demo allows for the exploration of a chosen strategy without the fear of significant losses or the need for full commitment. Once an optimal approach is identified, confidence in real markets is likely to increase.

Poor risk management

The last but certainly not the least important reason for failure is not managing risk properly. A lot of people forego even the basics, like not overleveraging and using take profits and stop losses.

In forex, wins and losses are often incremental. If you stick to these small increments while your profits edge out your losses consistently, you’ll likely find long-term success.

However, that also means that one big loss can wipe out most of what you’ve worked for or even put you in a significant deficit. And if you aren’t careful, that loss will almost definitely happen eventually.

The rudimentary precautions mentioned are a must for any trader. However, it is recommended researching risk management strategies. Finding one that supplements your trading strategy might just be what takes you from bouncing from wins to losses to being a consistent trader.

If you’ve fallen into one of these traps, don’t worry, the stats say you’re in the majority. However, you should always remember that trading is serious. It’s a skill that needs to be developed, and that needs to grow constantly. There are no shortcuts, and to prosper as a forex trader you need diligence, honesty towards yourself, and a sharp mind able to analyse not only the market but your own performance without bias. Don’t be afraid to take a step back and look at the bigger picture.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.