Why Do So Many Traders Fail?
Depending on who you speak to, the failure rate for new forex traders is somewhere between 80 and 95%. Thats right, as many as 19 out of 20 new traders will fail and either blow their account or quit because they couldn’t make it worth the time.
So, why is this?
There are more reasons than you might imagine, I’ll list as many as I can here and will add more as they come to mind, or as my fellow traders remind me of them. So, in no particular order;
Not Maintaining Trading Discipline
One mistake many traders make is to let emotions control trading decisions. Becoming successful forex can mean achieving a few big wins while suffering many smaller losses. Experiencing many consecutive losses is difficult to handle emotionally… Trying to beat the market or giving in to fear and greed can lead to cutting winners short and letting losing trades run out of control. Adhering to a well-constructed trading plan is key in maintaining trading discipline.
Poor Risk and Money Management
Too many new traders are so focused on how much they can gain in a trade that they forget how much they can lose.
Traders should know exactly how much of their account is at risk and are satisfied that it is appropriate in relation to the projected benefits BEFORE they open a trade, and should place their Stop Losses accordingly. As the account grows, capital preservation becomes more important. Using different trading strategies and currency pairs, together with the appropriate position sizing, can insulate a trading account from unfixable losses. Later, traders can split their accounts into separate risk/return tranches, perhaps with different brokers, where only a small portion of their account is used for high-risk trades and the balance is traded conservatively. This type of strategy can help ensure that low-probability events (Black Swan events) and broken trades are less likely to destroy one’s trading account.
Leverage gives traders an opportunity to enhance returns, but is a double-edged sword that magnifies the downside as much as it adds to potential gains. The forex market allows traders to leverage their accounts as much as 1000:1, which can lead to massive trading gains in some cases and crippling losses in others. The market allows traders to use vast amounts of financial risk, but in many cases it is in a trader’s best interest to limit the amount of leverage used.
Not only does leverage magnify losses, but it also increases transaction costs as a percent of account size. If a trader with a $500 account uses 100:1 leverage to buy five mini lots ($10,000) of a currency pair with a five-pip spread, they incur $25 in transaction costs [($1/pip x 5 pip spread) x 5 trades]. So, before the trade even begins, he or she has to catch up, since the $25 in transaction costs , or 5% of their account. The higher the leverage, the higher the transaction costs as a percentage of account value, and these costs increase as the account value drops. This is great for the broker, and one reason why new traders are encouraged by them to scalp since the revenue for the broker is high, relative to the small account value.
In some countries leverage is legally limited to 50:1 and new traders in particular may find this a sensible level.
Trading Without A Plan
Similar to money management in many ways, this refers to the extraordinarily high number of new traders who simply jump into trading with no idea of what they can reasonably expect to get from a trade, how they would get it, and often absolutely no knowledge of the forex business. Its like opening a High Street shop without knowing what you are going to sell, how much you need to sell at, or if prospective customers would be interested in what you sell.
Take the time to study at the free school on BabyPips. When you’ve completed your studies you will understand how to devise a strategy and trading plan that suits you as an individual. We are all different, with different hopes, pressures, finances, etc, so you can’t simply copy someone else’s strategy and plan, it needs to be tailored to you.