Why do most forex traders fail?
Most people start Forex trading with the expectation of making large sums of money within a short period of time. Something which even experienced traders struggle to achieve. This is due in part to the influence of numerous false marketing campaigns promising ridiculous rates of return within just 2-3 months.
There are many reasons why a trade fails, but most would fall under 3 categories: Lack of psychological discipline, poor money/risk management, and unrealistic goals.
Fear and greed are the two main emotions that every trader will go through at some point of time, negatively affecting their decision making.
Greed, the most dangerous emotion for traders, often leads to overleveraging, overtrading, and irrational decision-making that puts your capital at stake. A common sign of greed is when traders start hoping prices move toward their desired direction.
An amazing entry right at the start does not guarantee that the market will not turn against us in the future. Even after realising that the price might move in the opposite direction, instead of cutting losses, many traders hang on to their greed and ego, convinced that the price is about to change in their favour.
Fear on the other hand often results in trading paralysis, where traders end up not making any trades or exiting a position early even when price moves in your direction. Fear will hinder your trade result even with a good trade strategy.
Many traders are hyper-focused on coming out with a perfect strategy that they neglect having proper money/risk management, which is far more important.
Risk to Reward
To be profitable, most would think that it requires us to be right, more than 50% of the time. However that is not entirely true. With proper risk to reward ratio we can even be profitable without being right most of the time.
Let’s take an example of a risk-to-reward ratio of 1:2.Each time you’re wrong you lose $100, while each time you’re right you make $200. You made 10 trades with only 40% winning rate.
In this case you’re losing on 6 trades and winning on 4 trades. You’re losing $600 when you’re wrong but made $800 when you’re right. An overall profit of $200 is then made with just 40% winning rate.
Having a risk-to-reward ratio in mind is important, however we have to set realistic goal based on technical analysis for us to determine our stop loss and take profit. If the risk-to-reward ratio for your stop loss and take profit isn’t ideal, stay out of the trade unless you’re willing to take higher risk.
Many traders chase after unrealistic goals, like making a 100% profit over a short period. Unable to achieve this, they will start turning from trading to gambling. This only increase their risk to the point where trades start failing.
Be selective with your trades, never hope or guess on news or market price. Trade what you see and know when to increase the probability on each trade, as well as sitting out on trade that you’re unsure of.
Having a proper plan and sticking to it is of great importance, beat the market through mathematical probabilities instead of gambling.