Top 9 Reasons Why Traders Fail in Forex

I came across many people who have asked me about Forex trading and perhaps financial trading on the whole. It is not an easy task explaining why trading can be so risky to the retail trader. First and foremost, trading is way riskier then traditional investments like mutual funds (unit trusts), bonds and stocks.

Forex is categorized under Financial Futures. It is the riskiest asset class along with Derivatives. The irony is the general public feels that these asset classes are a faster path towards financial freedom. Many have failed to realize that while trading currencies can be an alternative investment tool, it may actually cause financial destruction to the uninformed trader.

Whether you are a seasoned trader or new to the currency market,the myths about currency trading are always swirling around. These myths can potentially affect anyone, no matter how long they have been trading. By knowing some of the major myths, traders can avoid unnecessary frustrations. There are many trading myths, however we'll look at 9 that come up often and affect every stage of development.

Get Rich Quick

Advertising has rapidly expanded the retail market in forex. This has brought many people into the arena who are on a quest to get rich quick (or with little effort). This unfortunately is very rare indeed. Trading takes patience and there is no final destination. Traders do not make money and then walk away; rather they make trade after trade, even if there is time gaps in between. Therefore trading equites consistency, not a gambling-throw-it-all-at-a-couple of trades mentality.

The Market is Rigged

Losing traders often point to a rigged market or a corrupt broker as the reason for their failure. While it is an easy assumption to make, forex is not a scam. The forex market is by far the largest in the world swayed by hundreds of thousands and potentially thousands of inputs each second. This means its likely that if someone takes a non-businesslike approach to their trading, one of the other savvy participants will usually quickly notice - this is the way of all markets. (Forex scams are more common than you may realize. Know the signs before you throw your money away).

You Can Be Right Every Time

Losses occur, and attempting to find a strategy that is right every time will either leave the trader on the sidelines indefinitely or will bring the trader into the market with an over-optimized strategy that will not adapt to new conditions. Accepting that losses occur and finding a strategy that gives a slight edge in the market conditions that are trad is enough to bring in positive returns.

You Can Easily Make Money Trading News

In hindsight, seeing a move in currency after a high impact news announcement like the U.S Nonfarm Payrolls Report can make people salivate with thoughts of making quick money. This is far from reality as news events can be extremely hard to trade in real-time. What the charts generally do not show is that often there is no liquidity for much of the move once it starts, or get out of a losing trade once you are in it. Although it is possible to set up a trade before an announcement is made, execution requires analysis of the presented statistics in order to determine the likely effect on the market. This analysis must be conducted almost immediately as other traders are gauging the same indicators. Therefore, trading news takes a meticulous strategy, and consistently easy money is rarely found.

More Trades With More Pairs Is Better

While it would be nice to think that if a trader makes money trading once per day, that they can make 10 times as much as trading 10 times a day, this is generally not the case. Trading less and focusing on a few currency pairs that the trader understands will bode well to most traders. Unless a trader is skilled and focuses on scalping strategies, the majority of traders will benefit from being patient, focusing on something they know and waiting for the best opportunities - few as there may be.

Predicting The Market is How To Make Money

Attempting to predict can be the downfall of a trader, although it is what most novices attempt to do. Predicting can blind us, as it causes a psychological bias towards a position and can disrupt our rational judgement. Traders must be nimble, trade according to a system and take the losing trades with the winning ones. The market, which is consistently moving, should dictate the trades at are made.If a prediction is made, the trader should wait for the movement of the currency to confirm that the prediction is right.

The More Complex the Strategy The Better

Traders often begin with a simple strategy, and see a small return. They then assume that if they continue to tweak their system, taking into account a few more variables, that they will increase their returns. This is not usually the case. Instead of looking at simple things such as price movements and whether the market is trending or ranging, the trader attempts to determine exact reversal points and make more trades. Trading profits are made at the margin - even the best traders only win slightly more than they lose. Therefore, if a system makes money, stick with it and do not change it; focus on money management instead.

Money Management Means Placing A Stop

Money management(MM) is arguably the most important factor in determining success once the trader has developed some skill in getting consistent returns. MM is not simply placing a stop order on a trade; rather it encompasses how much of the total account will be risked on each trade - this should generally be less than 3%. It will also look at how many trades can be opened at a single time. By focusing on MM a trader takes their trading to the next level, ignoring MM means imminent failure, even with the best strategy.

You Can Simply Follow Others

There is always lots of advice to be given on how to trade, what to trade wnd when to trade. Yet ultimately it is the trader whose money it is, and will be the sole recipient of profits and losses. Therefore, since it is the trader's money at stake they should make every attempt to develop their own skills and come to their own conclusions instead of purely relying on the advice of others. Experienced professionals can greatly aid new (or other experienced) traders, but all information should be filtered and scrutinized before the information is acted upon.

The Bottom Line

The currency markets are full of myths that can harm a trader's chances at success or can lead him astray. Develop a solid trading plan that is personally tested and take full responsibility for the success or failure of that plan; in this way the effects of the myths will be diminished or discarded altogether.

Happy Hunting.