If you have been reading up on forex trading, you may come across an eye-opening report with statistics claiming “95% of traders lose money” or “only the top 5% of traders manage to make a living from trading.” Those are demoralizing numbers for anyone who is trying to succeed in forex trading. While the numbers vary between studies, the fact is most traders end up losing money in trading.
The reason why almost 95% of traders don’t succeed in forex trading is down to various reasons. These reasons include the following:
- Poor money management
- Bad timing
- Poor strategy
All the factors mentioned above play a role in achieving trading success, but there are deeper reasons why most traders end up losing in forex trading. We are going to explore the reasons why 95% of traders don’t succeed in forex trading in this article.
Most of the reasons why people fail in forex trading are because they don’t have a reasonable concept about trading and why they are trading. For many people, the motivation for getting into forex trading is the dream of becoming rich overnight. They are attracted to the lavish lifestyle of successful traders. However, they don’t consider the obstacles they overcome on their journey, or the years of experience they have acquired to get to that level.
Most people are only attracted to instant gratification, which reflects in their approach of trading in the market. This is the wrong approach towards forex trading. You don’t become successful overnight in trading. The 3 main reasons why people don’t become successful in forex trading are:
- Poor risk management
- The absence of a trading plan
- Lack of strategy or tactics that lead to success
We are going to cover the major reasons why 95% of traders fail in forex trading in greater detail below.
Reasons why traders fail in forex trading
Most people don’t take into account the requirements for becoming successful in trading and expect to achieve success with basic talent and skills. To succeed in forex trading, you must have a realistic mindset and a firm grasp of your own abilities. Traders sit in front of computer screens for hours on end, waiting for trading opportunities to present themselves while staring at price charts. You need patience and discipline to capitalize on the opportunities that present themselves, for which you need a trading strategy. It is a fundamental part of obtaining success in forex trading. Without a trading plan or a trading strategy in place, you will struggle to succeed.
Trading on the forex market is also psychologically draining, and a lot of traders don’t have the patience to study the market. They get bored, frustrated, or tired, and start making silly trades without considering all the factors of that trade. To humor you, we will say that the statistic of 95% traders failing may be a touch high, but it is fair to say that forex trading isn’t easy by any stretch of the imagination. At The5%ers, we have worked with all kinds of traders over the years and have witnessed first-hand how traders end up ‘cutting off their legs’ when trading. All traders, who struggle to advance their progress and losing trades, share the same characteristics. These are:
- Unrealistic expectations about the market
- Overcomplicating their analysis
- Trading with money they can’t afford to lose (money for bills, mortgage, etc.)
- Having poor money management
- Chasing market noise and price, instead of using reliable data
- Spending a lot of time over charts instead of trading
- No consistency due to a lack of a trading plan
- Failing to deal with a loss and reacting emotionally
- Impatience and not waiting for the right moment to trade
Go through the list of characteristics mentioned above to find out how many points you are guilty of. Have you been making the same errors? You may be if you’re failing in forex trading. However, don’t worry about this as you’re not the only one making those errors. All traders struggle with these problems, which is what mainly stops them from being successful in forex trading.
Now let’s cover the 3 main reasons why 95% of traders don’t succeed in forex trading:
Lack of a trading plan
The most obvious reason that explains why almost 95% of traders fail in forex trading is down to a lack of a proper trading plan. The only way you will manage to become a consistent and profitable trader is by treading trading like a real business. A trading plan is a systematic method for evaluating and screening currency pairs for determining the risk that you should take or is available to you. This will allow you to form long and short-term investment objectives.
Any successful trading plan will include details about the trading system you must use. However, when amateur traders start to invest in the market, it can become difficult for them to create a trading plan. There is an easy solution to that problem and answering some simple questions should help you create an appropriate trading plan that suits you. These questions are:
- What time of the day do you want to trade?
- How long will you hold your positions/traders?
- How much are you willing to risk?
- What are your trading goals?
- Which currency pairs are you following?
An appropriate trading plan improves your chances of making successful trades in the forex market if you align it with a proven strategy that is efficient. We are going to discuss the strategy next.
Lack of strategy or tactics that lead to success
A lack of a profitable trading strategy significantly reduces the chances of traders finding success in the forex market. So, what is the best way to find if a strategy is profitable? You back-test the strategy. If you don’t know what back-testing is, don’t worry. It is quite simple. To back-test a strategy, all you must do is take that strategy and implement it in the charts using data from previous years. For example, if your strategy is based on a harmonic pattern, you must investigate the price action of 2017 and find out how many traders used that specific harmonic pattern that year. You shouldn’t limit yourself to testing a system for only 1 year or for 100 traders.
Once you have conducted the test, you will learn whether a strategy was profitable or not. This will be determined by the results of the test. So, if you find out that out of 100 trades, 60 were losses and 40 were winners, does that mean this strategy isn’t worth it?
No, it means that if a trader uses this strategy they will win 4 trades and lose 6 trades on average. But, if the trader uses authentic risk management techniques, they will find success in the forex market.
Poor risk management
One of the most common mistakes made by traders in forex trading is poor management of funds. When it comes to investing in any market, risk management is essential. The same applies to the forex market. Traders should use lot sizes based on the money available in their accounts. This is the one thing that separates successful traders from those who fail in forex trading. Successful traders avoid losing money by managing their funds efficiently.
Any trader with poor risk management isn’t going to win a lot of trades, which is one of the main reasons why they are failing in forex trading.
A lot of problems in forex trading are psychological. Traders who give up too easily will not find success in forex trading since they don’t have the psychological traits and character required for success. The top 5% of trades are continuously spending time on personal improvement and fine-tuning their trading strategies, which is what it takes to have a successful trading career.
The forex market will tear you apart psychologically. The financial sector is a super-competitive and ruthless world that has brought grown men to tears. It’s imperative that you know what your weaknesses are and work to improve them since you will have a lot of ups and downs in the forex market. Most forex traders tend to lose money, but this doesn’t mean that you will lose money as well. Work on improving your weakness, on developing a solid trading plan with a successful trading strategy, and on improving your risk management. Only then will you be able to find success in forex trading.
Photo by Gabriel Matula