3 Reasons Why Forex Traders Take Losses, and How to Prevent Them
You’ve probably heard the myth that 95% of forex traders are taking a loss, and that becoming a successful trader is extremely difficult. In actuality, this stat is a completely fabricated exaggeration that has been passed around and regurgitated until people actually believe it. The fact is, the majority of trades in the forex market result in gains for the trader, however most traders are still taking losses, but not the ridiculous 95% that is often cited without any factual basis. So if most trades result in gains, why are so many traders not coming out on top overall? Below we’ll look at the top three reasons why many forex traders lose in the long run and how you can prevent yourself from meeting the same fate:
1. Most Traders Don’t Practice and Research Enough
To really understand why so many traders are losing we have to look at the demographics and characteristics of the majority of traders. Most current traders who are still taking an overall loss have less than a year experience, and instead of practicing using an online trade simulator or similar solution, they just head straight for the real life trades and start “learning from their mistakes.” The problem is, these (very real) mistakes are doing more than teaching lessons, they’re costing the trader money, and there’s no guarantee that you’ll be able to avoid the same mistakes in the future. Practice using simulators, observation, and research rather than trying to use trial and error. Too much trial and error will only serve to put you on the losing side of the stick more often than not.
2. Traders are Losing More on Losing Trades Than They’re Gaining on Winning Trades
It’s true that more than half of all trades result in a gain for the trader, but the problem is, the losing trades have more of an impact. For example, about 60% of EUR/USD trades close out with a profit for the trader, but on average the winner is only gaining about 48 pips. Meanwhile, the other 40% of the time the same trade will result in a loss of almost 85 pips on average, so the heavy losses are negating the profits from the wins. These statistics are at the core of why most forex traders aren’t able to consistently win over long periods of time and earn a profit. If you’re losing almost twice the amount you’re gaining, it doesn’t matter that you’re winning most of the time – you’re still losing in the long run.
3. People are Stubborn and Greedy
This third reason might seem like a broad generalisation that could be applied to anything, but greed and stubbornness are in fact the two main reasons why most traders are unable to cut losses before they become greater than gains. The reason why that’s not an easy thing to do for many traders is because they’re too stubborn to turn back on their decisions.
The Solution: Let Your Wins Run Longer and Cut Your Losses Faster
If you notice a trade is doing well from the beginning, let it keep running. Adversely, if you notice a trade is not doing so well in the beginning, don’t bank on the chance that things will turn around – cut the loss immediately. The formula for successful forex trading is really this simple: keep your average loss amount to a minimum and focus on making winning trades most of the time.
