As any experienced trader will tell you, navigating the markets is not easy, if it were, everybody would be doing it and we would all be rich. The more involved you become, the more challenges you are going to become aware of. FOREX markets are tremendously popular around the world, it’s the one market that I know traders from every continent. Frankly, some of these traders live in undeveloped economies and it may surprise you that they even have internet access.
Everyone is chasing a dream, one of financial independence, and more control of their time. Because of the high leverage of Forex, it allows many traders to take a chance on doing something that could be life-changing. However, the sad reality is, that for every trader who succeeds in trading currency markets, there will be dozens who fail.
A veteran trader once said, “the job of the market is to take your money.” These failures can come from a variety of reasons, and it doesn’t mean that failing traders are incapable, but merely suggests that the market is doing its job, taking other people’s cash.
Today, we will look at 5 reasons why traders fail at Forex.
Too Small Account Size
This is a problem that might be observed in Forex more than any other type of market. This is because many brokers around the world allow a customer to open an account with $250, or even less. In this case, they are making the dream available to anyone, however, it is challenging to learn with an account that size, and it is extremely unlikely that anyone will be able to turn that amount into any kind of cash flow. Trading is all about learning, many times from mistakes. The problem with an account too small is that you only have a few chances before you run out of ammunition.
Too Much Leverage
This problem piggybacks off the first one. Take for example, in the United States, the regulatory agency restricts leverage to 50:1. This means it requires $2,000 to control $100,000 worth of currency. However, in other parts of the world, some brokers offer as much as 1000:1, which means it would only take $100 to control $100,000 of currency. While some speculate that the U.S. has too tight a restriction, clients are much better served by this tight regulation than none at all.
Chances are, if you depend on leverage on steroids to keep trading going, you are not in a position to be trading. With micro-sized lots, there is enough opportunity for many, if not most would-be traders, to be able to get a share of the market without over-leveraging. Just for added perspective, most of the successful, long-term, fulltime traders I know, don’t use more than half of their leverage, in other words, they opt to use no more than 20:1.
Neglect the Fundamentals
This is a problem that works both ways as you will see with #4. However, because there are so much technical analysis education and so many technical indicators, many traders believe they can eliminate the fundamental concern of their markets. My thesis is, no matter what timeframe you trade, this is still something to be aware of. There are instances when extremely short term traders can pay less attention to the fundamentals, however, even for micro timeframes, one would still need to be aware of any scheduled economic releases that could cause a quick, and dramatic price fluctuation.
Neglect the Technicals
Likewise, because currency markets are theoretically driven on fundamentals, some traders refuse to give much credence to technicals, often at their detriment. Take for example a lady I once knew, probably the smartest person I’ll ever meet when it comes to economics and various fundamental factors of the market. Because of her brilliance and value to the company, her firm gave her money to trade. She was almost always correct on her fundamental view and the broader direction that the market would take. However, she was constantly too early, which in trading means she was wrong. If she has used technicals to compliment her fundamental view, she would have had more precise and responsible entry points.
Experienced traders are aware that volatility can be a big friend, but we also know that this is a two-edged sword, because friends have been known to stab you in the back. I met a guy one time who had just started trading FX. When I asked him what he was trading, he told me it was the U.S. Dollar and Turkish Lira (USD/TRY). I instantaneous knew why he was trading that market, because it was experiencing an extreme measure of volatility, in a way that only a less liquid pair could.
I never did ascertain if he was claiming to make money or not on this pair, but my question was why a new trader would do such a thing. Perhaps it was a news headline that intrigued him, or maybe a trader friend of his who was more experienced was working that market. I don’t know the answer, but I know that until a trader has been around the proverbial block for a while, they are asking for a disaster when the experiment in those kinds of markets. There is a reason why volatility is so intriguing because, for everyone who makes money, there are others who are getting crushed and blowing up their accounts.
These are just 5 of the conditions that cause traders to be unsuccessful at Forex trading. However, there are several more that I may cover in the weeks to come. If you have any additional reasons why it’s hard to succeed in Forex trading or your remedy for these 5 listed above, let me know in the comments section. Stay safe traders!