Everyone who decides to try Forex and stock trading wants to make money. When a person opens a trading account and makes a deposit, the picture is always rosy: the account shows impressive gain in no time, so it's possible to buy a new computer, a car, or even a house. Even thinking about these benefits makes us happy and expectant. We aspire for the things to come. Wouldn't it be wonderful if trading meant profit and nothing else? For sure, life would be easy if traders always earned money. However, you've probably heard that people can lose money in trading. You probably had losing trades yourself.
Is there a way out of trading losses? This article tries to get to the bottom of the problem and find out why traders lose money. Spend a couple of minutes learning how not to fail in financial markets.
Trading can be tricky
It usually takes a couple of minutes to click "Buy" or "Sell" and open a trade position. However, even though trading may seem simple, it certainly isn't. You have a losing trade if the market doesn't go in your favor. To make money, you put your own money at stake.
It's necessary to understand that a loss in a trade isn't the biggest problem. If you are careful about your trading volume and don't spend your entire deposit on a single transaction, you'll have plenty of money left on your account even after a bad trade. As a result, you'll have more opportunities to open better trades. However, if you are impatient and too eager to multiply your funds fast, a single losing trade may wipe your deposit. You'll probably be highly disappointed and quit.
What conclusion can we make from this? There are two. First, trading is risky and can lead to losses. Second, there's a way to minimize losses and maximize the potential profit.
What percentage of traders lose money?
It's difficult to give an estimate of how many traders lose money. The data from various institutions differ. For example, according to the US Securities and Exchange Commission, 70% of Forex traders lose money every quarter on average. Etoro says that 80% of day traders lose money over a year.
Who suffers the most? On the one hand, beginners who don't pay much attention to studying and want to open their first trade as quickly as possible are at risk. On the other hand, people who started trading and made some progress may feel overconfident and neglect risk management. They may decide at some point to risk too much in a trade. As a result, their previous progress will be ruined.
Why do most traders fail?
Let's examine the main reasons why traders lose money.
- Trading is a complex process. To trade well, a person has to invest time and effort. Not everyone is ready to pay attention and work for the result.
- Trading strategies require discipline and accuracy. Many people lack those qualities. Even though they have the best intentions, they either forget to act systematically or are too lazy to do that.
- There are no guarantees. It's often hard to accept the kind of uncertainty in the market.
- Traders can be reckless. They may forego market analysis, dodge setting Stop Loss orders, and the risk management rules. All of this leads to mistakes and bad trades.
How to avoid losing money in trading?
If you want to become a successful trader, you must accept that some losses are inevitable. Acceptance is the first and crucial step. Only if you know your enemy can you fight it and win. If you are aware of risks, you will be more prudent and make better decisions.
Below you'll find recommendations to follow. These tips represent the best practices of trading.
Start with training
To succeed, you need to learn how to pick levels for opening a trade, how to determine the future direction of the price, where to place Take Profit targets, and Stop Loss orders.
After you read about these things, watch a video or attend a webinar, you'll have to practice trading on a demo account. Of course, demo trading won't bring you any real profit, but only it can give you a sense of trading.
Follow the news in trading
The news drives financial markets. Stocks feel the impact of company news such as releases of new products and mergers as well as the publications of earnings reports. Forex pairs rise and fall on the expectations about the economic releases in the major economies. You'll find the schedule of these releases and the forecasts for various indicators in the economic calendar.
If you don't know what's happening with an instrument you're trading, the price's sudden moves may catch you off guard. Follow the news, be prepared, and you will be able to avoid losses and grasp new trade opportunities.Some traders even prefer trading news to merely technical strategies.
Start with small money
Your own trading experience is your most significant advantage in trading. It's best to acquire this experience while your account is still small. It'll be psychologically more comfortable for you because you won't be too nervous about each trade. Such an approach will allow you to concentrate on making proper market analysis and developing a trading strategy with a high win ratio.
Then, as you gain more experience and your deposit grows, you'll be able to increase your trading volume. The most important thing is to do that gradually. Professional traders who stay in the market for a long time recommend not to risk more than 5% of the account in a trade. Even as your account grows, you'll be protected from big losses if you follow this principle.
Respect the trend
Trend trading is preferable over counter-trend trading. A trend acts as a filter that helps eliminate bad trade ideas. If you go in the market direction, you increase your trade's probability of success. Buying in an uptrend and selling in a downtrend is more likely to pay off. Look at it this way: you boost your chances of making a profit, and it's wise to use every opportunity the world offers.
Never trade without a Stop Loss
A "Stop Loss" even sounds positive. What can be better than stopping losses? When you set a Stop Loss, for example, at 20 points, you limit the amount of your losses in a trade. If your trade volume is 0.1 lot, 20 points will account for $2. In other words, you won't lose more than $2 in this trade. At the same time, the price may trigger a Stop Loss and reverse in the correct direction. There's no insuring from such a scenario, so you must weigh the costs against the benefits. Yes, sometimes your Stop Loss order will be activated prematurely. However, if you have a good trading strategy and your winning trades exceed the losing ones, your trading will be profitable. Occasional Stop Losses will be the payment for trading because they will free your mind from the concerns about the safety of your deposit and get a chance to plan other trades.
Go for a calculated risk
Your risks are something you can have complete control over. That's why it's important to use this advantage. In every trade, you are free to choose the risk/reward ratio, i.e., the ratio between Stop Loss and Take Profit. The best way is to make sure that your Take Profit is always bigger than your Stop Loss. If the Stop Loss is 20 points, as in the previous example, with a 1:3 risk/reward ratio, your Take Profit will equal 60 points. If you opened a 0.1 lot trade, 60 points would account for $6. Again, you risk losing $2 to earn $6. If you stick to this ratio, one good trade will bring you three times more money than you will lose in a bad transaction. With a trading system that gives more than 50% of good trade ideas, you will be in profit.
Examine numerous indicators
How to find a good trading strategy? The recipe for a profitable strategy is that it should have several components. In other words, you shouldn't make your buy/sell decision based only on one technical indicator. Indicators and other instruments of technical analysis should confirm each other. Combine two or three indicators of different types, for example, Moving Averages and Stochastic. Your trading strategy may also rely on candlestick and chart patterns and the usage of Fibonacci instruments. In this case, the system will give you signals with a high probability of success. If you use such a strategy together with Stop Losses and a correct risk/reward ratio, you'll be able to avoid losses in trading.
Conclusion
As we have discovered, many traders fail and lose money. If you don't want to be one of them, if you're going to be different and succeed, you have to learn from the mistakes of others and make correct steps from the start.
Author: FBS Analyst Team
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