There's no doubt that Forex Trading is a complex activity, full of risks and obstacles. All traders are aware of this, even beginners (at least they should be). No one expects to enter a land of milk and honey. Yet, it can happen (indeed it often happens, especially at the beginning) that things go more awry than expected. In short, that money is lost at an excessive rate, even for an inexperienced trader. In these cases, it's certainly not advisable to throw in the towel, but stopping to reflect is. Specifically, reflecting on
the main reasons why you're losing money.
In this article, we'll talk exactly about this: the most frequent reasons that can cause failure.
The trading system is wrong
Obviously, you need to have a trading system. It's simply unthinkable to do Forex Trading without a trading plan, that is, without a codified set of rules that suggest to the trader how much to invest, how to invest, in which specific contexts, and based on which analyses. The problem is that often the trading system is wrong.
Understanding if the trading system is wrong is actually quite difficult. It is for a simple reason: a TS that works well for some traders may not work well for other traders. The truth is this:
the right trading system is a trading system that first of all adapts to your own style, your goals, and your economic capabilities. The advice, therefore, is not to adopt a "package", but to create it from scratch, or at least to elaborate on an existing one.
Obviously, there are also trading systems that are wrong in an absolute sense, but you simply need to steer clear of those.
The goals are too ambitious
The trading system is important, of course, but everything starts with the goals. Goals that, it should be said, must be quantified in a precise way. That is, they must answer the question: how much do I intend to earn? In any case, even if the goals are not achieved faithfully, it would be a success even just to approach them, to tend towards them in a way that is as constant and linear as possible.
The problem arises
when the goals are too ambitious. In this case, it's the pace of the approach march that suffers. Specifically, the pace becomes too fast and, very simply, you risk stumbling. Setting goals that are too ambitious often means procuring anxieties for oneself, and this in turn leads to an imprudent attitude.
In short, it's like putting yourself in a hurry. Too bad that in Forex Trading, as in everyday life after all, haste is a bad advisor. It is even more so if money is involved, moreover to be managed in a hyper-competitive and objectively complex environment such as the currency market.
The money management program is radical
This point connects to the first one, that of ambitious goals. It's natural that if you set the bar too high, you're forced to take more risks. The problem lies in the fact that, on paper, all money management plans work, if only because they roughly indicate how much, in the worst case scenario, you will lose. Of course,
losing many trades in a row is unsustainable even if there is an apparently solid money management program behind it.
Also because money management, in the end, suggests how much money you will spend for each single trade. Well, this money, or the bet (to use a perhaps improper term of gambling) is too high. The problem doesn't arise, or arises to a lesser extent, if losing trades don't outnumber winning trades. Otherwise, the risk of suffering a significant and sudden capital erosion is really high.
The trading style is not consistent with personality
This is a fundamental point but one that is rarely dwelt upon. It may be that at the origin of the failure there is an error of approach, a basic error that prejudices all other factors. Very simply,
you are doing Forex Trading in a way that has little connection with your personality. It's not necessary to bother with complex psychological theories about it. It's enough to reflect on your own character, on your qualities and defects.
Let's give an example. If a person has a cool head and is able to juggle emergency situations, without losing lucidity, he can adopt a faster style, maybe even riskier, that focuses everything on Intraday Trading. If a person is more measured, has long times, finds himself better pondering and studying, the best style is Multiday, if not even Swing. Therefore, the advice is first of all to know yourself. Once you understand "what you're made of", you can proceed with the faster or less fast adoption.
Discipline is lacking
This is also an important aspect. Discipline can be defined as the oil that allows the engine to turn, that makes the machine more fluid. It's a conditio sine qua non. It is not only so in an absolute sense, perhaps because the concept of discipline is morally superior to that of anarchy. It's really a functional issue. Discipline is a tool that serves to neutralize some dynamics that would otherwise be natural.
Specifically, discipline has the purpose of reducing the margin of discretion. It binds the trader to do what is right and not what, at a given moment, he
feels is right. This is because when you're in the eye of the cyclone, excessive freedom can be a bad thing, precisely because it's in that phase that you risk losing lucidity.
So, it's good to be disciplined.
To whom? To yourself obviously. Or, to put it better, to the yourself of some time before and therefore in possession of all mental faculties. In plain words, you have to be faithful to your trading system. Whether this can be wrong is another matter, and we talked about it a few paragraphs ago.
The financial leverage is too high
This is a technical problem, but one that is linked to that of ambitious goals. Simply put, the leverage could be so high as to multiply losses exponentially and unsustainably. Let's be clear, leverage, if used well, is a formidable tool to accelerate time, to overcome a hurdle that would otherwise be insurmountable: the paucity of starting capital. A problem that, among other things, concerns many retail traders, that is, those who approached during the
new course of Forex Trading.
However, it is also a very dangerous double-edged weapon. We have already said why:
it multiplies losses as well as it multiplies gains.
If the triggering factor is only leverage, there is good news: it's easy to neutralize. Just choose a lower leverage. Generally, by convention, you should never go beyond the 1:50 ratio, but it is advisable, if you are not great experts on the subject, not to go beyond 1:20, which is still a respectable leverage and able to create the conditions for significant gains.
Also read:
- Why it's Important to Use High Leverage in Forex Trading
- What Leverage is in Forex Trading and Why You Need to Be Careful
- Why There's So Much Talk About Financial Leverage in Forex Trading?
- How Leverage Works in Forex Trading
Adaptability is poor
We have already talked about discipline and how important it is to make your trading activity truly profitable.
However, even its extreme opposite can be deleterious and cause a hemorrhage of money: the lack of flexibility, of adaptability. The need to possess this gift to at least a sufficient extent arises from a detail that is not of little importance: theory is one thing, practice is another.
It may well happen that the trading system is perfect on paper, and that it is also perfect in the backtesting phase, i.e. the test on past data. However, there will always be situations and eventualities not covered by the plan, with respect to which it is not able to offer solutions. In these cases, the alternatives are two: either exit, and it's certainly never a bad idea, or
stay and try to govern the emergency. In the latter case, adaptability is essential because it allows you to find new tools to get out of the impasse, without prejudice to the fact that it is the head that must be used and not the instinct.
Technical analysis is very complicated
Often, this problem is not even noticed. This happens because often, in experienced and less experienced traders, an underlying prejudice persists, albeit unconscious: that simplicity is synonymous with approximation. So we choose the often wrong path of complexity, which results in
a cumbersome, confusing, contradictory technical analysis. This happens when you use many indicators and all difficult to read. In this case, the risk of receiving conflicting signals is really high.
The advice is to adopt a simple and linear model of technical analysis, as well as to prefer, when possible, indicators that are easy to read. Sometimes, a simple analysis of lows and highs or very basic moving averages is enough.
The broker is poor
This is also a problem. Indeed, if it were the only one, it would certainly be good news. It would mean that the solution is at hand: you change the broker and the game is done.
There are many reasons that make a broker... A terrible broker. In parentheses, honesty has nothing to do with it, as it is
obvious that you should only choose brokers that do not hide a scam, and in fact it is really easy to discern between rotten apples and healthy apples.
The issue revolves around the trading environment. This can be unsuitable for a profitable trading activity. For example, when the broker imposes spreads that are too high, or provides platforms that leave something to be desired, which are characterized by excessive slowness and cumbersomeness. Therefore, the advice is to look first of all at the approach that the broker adopts in terms of economic conditions and usability.
Also read:
- What is a Trading Broker?
- Why and How to Choose a Good Forex Broker
- TopFX Review: The Perfect Broker
- Choosing the Broker: ECN vs Market Maker
Poor training
Finally there's him, the problem of problems. It's possible, ugly to say, that you're losing money because you're not good enough, maybe because you've undergone a questionable training path, which has left you with gaps.
Too bad you realize you don't know when it's too late, that is, when you've already missed the appointment with the market.
The advice is to
verify that the training period was characterized by the presence of a period of practice, a complete program, perhaps suggested by someone competent (even a broker), by the commitment made over months, if not even years.
Also read:
- Free eBook: How to Start Forex Trading for Free
- How to Start Forex Trading from Home
- EvoForex: the Forex Robot for Automatic Earnings [+Forex Course]
- 10 Best Forex Trading Books
