Why do we lose money in forex?

Why do we lose money in forex?
Why do we lose money in forex?
The foreign exchange market (forex) is the largest financial market in the world. The volume of transactions in the forex market sometimes exceeds 5 trillion dollars a day. Of course, while there are many forex investors, only a few succeed. The reason traders fail in Forex is similar to the reason other investors fail in other financial markets. In addition, the excessive use of leverage and the need for a low margin when exchanging foreign currencies is one of the factors that causes the risk of forex transactions to be high. In this article, we want to examine the various reasons why traders fail in the foreign exchange market, and answer the question of why do we lose money in forex.

The special features of the forex market have caused traders to expect more profit from this market. But in the forex market, despite the opportunity to earn more profits, there are also more risks that can destroy your capital.

Common mistakes in forex

There are common mistakes that can prevent traders from reaching their trading goals. In the following, some of these factors are mentioned and the pitfalls that exist in the way of forex traders are introduced:

Not paying attention to discipline in transactions

The biggest mistake a trader can make is not being disciplined in trading, and letting emotions get in the way. Successful Forex traders make large profits on a small number of their trades while incurring numerous small losses. Suffering multiple losses in forex is emotionally difficult, and requires a lot of patience and self-confidence. Trying to beat the market or letting fear or greed to drive you, can lead to inevitable losses and make trading difficult. The only way to deal with emotions is to build a trading plan that forces the trader to follow the rules.

Trading without a plan

Why do we lose in forex? It doesn't matter if you trade in the foreign exchange market or other financial markets. Your first step to trading success is to define a detailed trading plan and follow it regularly. If you fail to do this, you will ultimately fail. This is true for any type of trading in any financial market. Successful traders always consider risk management and money management criteria in their trading plan, and follow it. Sticking to a trading plan can help investors avoid some of the pitfalls of trading. In fact, not having a trading plan can reduce your profit-making capacity in the financial markets.

Failure to keep pace with the market

Before the market hours start, you should know your plan for that trading day. Performing technical analysis and fundamental analysis can help you plan your trading decisions. This can save you from unexpected losses. Of course, there is no general formula for doing this, and different strategies should be used to do it correctly. The most successful forex traders keep pace with market changes and adjust their trading strategy based on the prevailing conditions. Successful traders usually plan for low-probability events, and are rarely surprised when they occur. These traders are constantly studying market behavior and always find creative ways to profit from the foreign exchange market.

Learning by trial and error

Undoubtedly, one of the reasons why we lose money in forex is that we turn to the trial and error method to learn. Discovering a suitable trading strategy using the trial and error method is by no means the optimal way to do this. The best way to become a successful trader in the forex market is to acquire the experience of successful traders and use it. This can be done by studying, attending a forex course, or by learning directly from forex mentors. One of the best ways to improve your trading skills is to follow a successful trader, especially if it comes with hours of practice.

For example, you can learn about the trading strategies and ideas of successful traders by using copy trading and apply them to your trading account. Aron Groups broker has provided its users with the opportunity to copy trade with the social trading platform ZuluTrade and learn about the trading ideas of successful traders.

Unrealistic expectations

Regardless of what the majority of people think, it must be said that forex is by no means a quick way to get rich. Why we lose money in forex can be related to our unrealistic expectations from this market. Becoming a successful and profitable trader is like a marathon and requires persistence. Expecting huge and unrealistic profits from the forex market causes traders to unreasonably accept risk and ultimately suffer heavy losses. If traders think that the forex market is like a casino and that trading is gambling, then in fact all criteria of risk and capital management have been violated and there is no protection against loss.

Poor risk and money management

Risk and money management in forex is as important as defining and developing a successful trading strategy. Some naive traders make trades without using risk management techniques, and do not use risk management tools such as stop loss for fear of exiting the trade early. Successful traders are always aware how much of their capital is at risk and also know what percentage of the risked assets. As the trading account grows, capital preservation becomes more important. Diversifying strategies and currency pairs can protect the trading account against unexpected losses. Professional traders divide their trading account into several parts with different risk-to-profit ratios. This type of capital allocation strategy can protect the trading account against unexpected events and major losses.

Leverage management

In addition to what mentioned above, one of the most important reasons why we lose money in forex is the use of a tool called leverage. Excessive use of leverage can greatly increase the risk-taking of forex traders. Therefore, leverage management is one of the important measures to avoid loss in financial markets.

Using leverage gives traders the opportunity to increase their profitability in the forex market. But leverage acts as a double-edged sword. The use of this tool, in addition to increasing the profitability, also increases the potential loss. In the forex market, traders have the possibility to increase their leverage up to 1:400. This amount of leverage can lead to big profits in some cases, but it can also increase the potential loss. Financial markets allow traders to take a high level of risk, but it is always in the interest of traders to exercise caution in using this instrument.

Many professional traders use 1:2 leverage. This means that these traders can make $100,000 worth of trades by depositing $50,000. The amount of leverage depends on the amount of margin that the forex broker requests from its users for making transactions. Margin is actually the amount of capital that is locked with the broker as collateral, should the trader suffers loss, the broker can compensate the loss by using this capital. Anyone who has suffered heavy losses in the forex market must know about margin calls. In case of a margin call, the broker will ask you to deposit more money due to the lack of collateral. If the collateral is not provided on time, the broker will inevitably close the trader's positions to compensate for the loss.

One of the reasons why we lose money in forex is that the proper ratio between capital under risk and total capital is not observed. In this situation, the trader is forced to control large volume transactions with little capital, which usually leads to huge failures. For example, if a trader is using 1:100 leverage (which is common among forex traders), just a 1% drop in the asset's price can result in a 100% loss. Any loss in this situation will only increase the leverage used by the trader and cause more trouble.

Using leverage not only multiplies the amount of loss, but also increases the cost of trading. For example, if a trader operates in a mini account, and trades with a capital of 500 dollars and a leverage of 1:100, he can trade 5 mini lots, while the spread of each lot It is equal to 5 pips. In this case, the cost of making such a transaction is equal to 25 dollars, which is 5% of the total capital of this trader. The higher the amount of leverage, the higher the cost of transactions and makes it more difficult to compensate in the future.

While price fluctuations in the foreign exchange market are expected to be lower in the long term compared to the stock market, the inability to bear periodic losses and the negative impact of high levels of leverage is a factor that causes losses in forex. The existence of macroeconomic factors in forex and existing political risks have caused these problems to be greater in the forex market than in the stock market.

Bottom line

Many of the factors that cause traders to suffer loss in Forex are the same factors that cause losses in other financial markets. The easiest way to prevent loss in forex is to follow and learn from professional forex traders. You can learn things like risk and money management, and use it in forex trading. Only in this situation can you have a proper plan for your transactions and avoid accepting outrageous risks.

While understanding macroeconomic factors, technical analysis and fundamental analysis are necessary for success in forex, one of the reasons why we lose money in forex is the lack of success in trading account management. The main things you need to do to manage a trading account are to ensure that the amount of investment is appropriate, use the appropriate trading volume and limit the risk by using leverage correctly.

Written by: Mohsen Mohseni (Aron Groups).
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