Forex Trading Pitfalls: Why Some Lose Money and How Much

Forex trading and defeat, a sad combination, an association of concepts that for some hits very close to home. For many, it's a taboo and therefore difficult to face. We discuss it in this article, offering numbers and a reflection. Numbers on how many people are actually engaged in Forex trading solely - or predominantly - as a means of impoverishment. A reflection on the reasons for defeat, and on the (unfortunately deep) connection with the trading activity itself.

Forex trading and defeat: a close link

In the collective imagination, defeat belongs to losers, to those who don't do their job well, to those who lack effectiveness. In short, defeat is a bit of a fault and a bit of a tool that reveals incapacity. This should apply in all areas of life, including currency trading. But is this really the case? Well, it is only partly true. Of course, a significant portion of losing trades can be avoided, and when it occurs, the fault lies solely with the trader. In a significant number of cases, however, defeat is not a consequence, but rather an element inherent to the investment activity. We will discuss the reasons for this in the following paragraphs, but here we want to reveal a small but important truth: everyone loses, and by everyone we mean... Everyone. Beginners lose, experts lose, competent traders lose just like lazy ones. The distinguishing factor, if anything, concerns the actual amounts lost and the number of losing traders out of the total. Above all, what proves to be decisive is the management of defeat. Exactly, since defeat is inevitable, it is best that it is managed, that its effects are contained. Experienced traders do exactly this: aware that defeat "sooner or later arrives", they take countermeasures in advance, and ensure that everything is very sustainable. The reference disciplines, in this case, are money management and risk management.

A matter of percentage

Before describing the causes of losses in Forex trading, it is good to frame the phenomenon, that is, to investigate the number of traders who lose money in an uncontrolled way, or who end the year at a loss. In this regard, a chaotic situation is noted. A quick Google search is enough to understand it: almost everyone "shoots" their own percentage. Depending on the degree of optimism, losers now represent 80% of the total, now 85%, now 95%. In the best-case scenario, these figures are the result of studies conducted on a limited sample of traders, often far from representative. So, where can we find reliable data? Well, the regulations on disclaimers come to the rescue: brokers are forced to warn users of the risk, citing real data, and relating to the people who use their services. In fact, brokers are effectively forced to reveal how many of their users "lose money". It may seem a bit like shooting themselves in the foot, but it is an obligation, as well as a sign of transparency. So, it is the brokers themselves who offer an overview of losing traders, albeit fragmented. Perhaps it is difficult to extract a single figure that represents all traders (precise information on the total number of traders, broker by broker, would be needed), but it is certainly easier to get an impression as close to reality as possible.

The causes of defeat

Below, we present some of the factors that determine a losing trading activity. Some of the reasons are obvious, almost trivial, but still to be considered. Also because they tend to occur frequently.

Unpreparedness

It is the most obvious reason, which doesn't surprise anyone. From certain points of view, it draws a cause-and-effect relationship. It's obvious: in any activity, if the person performing it is poor, the consequences can only be negative. It must be said, however, that trading can be extremely punitive for those who make mistakes. The good thing is that it always gives a second chance. In any case, those who arrive unprepared do so because they are deceived by advertising campaigns that are not very relevant to reality, which present trading as the place for easy money. Thus, the aspiring trader, lacking the necessary skills, acts like a gambler, and condemns himself to defeat.

Emotionality

Traders are emotional. No, it's not just a matter of character, or at least not only. The truth is that the stakes are always high, and this causes stress, generating an inevitable and imposing psychological pressure. The best traders don't avoid emotions, also because it would be impossible, they simply manage them. They ensure that they do not affect the effectiveness of the trading action. Everyone else tends to lose lucidity, and therefore to make mistakes. Hence, the numerous losing trades.

Market complexity

Forex is a complex market. There are numerous dynamics that cross it, factors that move prices, elements to analyze even just to understand the present, let alone to predict the future. Therefore, the trader simply often fails to gather the necessary evidence, or finds the wrong ones. Consequently, he also gets the trade wrong and loses money. This dangerous drift, also the result of a structural element, can be partly avoided simply by... Doing one's best. That is, honing one's skills, treasuring defeats, studying not only before starting to trade, but also during. Continuous experience and training, in this case, help a lot and are often decisive.

Forex interdependence

This is a very controversial aspect, as it is ignored by many traders. There are those who prefer technical analysis, in fact they are the majority. These traders study the chart, and often do it well too. Too bad, however, that the price movement factors are also exogenous, that is, they come from the outside. The reason is simple: even if it does not emerge from technical analysis, Forex is connected with other markets. In particular with the stock market, but also with that of precious metals (and in particular gold). Those who do not notice these dynamics lose more often than others. But even those who are fully aware of them lose, simply because there are too many elements to analyze, to put into a system, and it is difficult to gather realistic evidence.