Forex is a commonly used abbreviation for “foreign exchange,” and it is typically used to describe trading in the foreign exchange market by investors and speculators.
Online forex trading has become very popular in the past decade because it offers traders several advantages such as;
- Low Trading Costs
- All round trading 24 hours a day
- International Exposure
- Unmatched Liquidity
- Offers Available leverage
In a nutshell, Forex trading is a play with numbers. Hence, finding the right balance is the key to success. However, there are many reasons why an average trader ends up losing money and encounters one sour trade after the other.
Without wasting much time, find below some of the major reasons why losses occur when trading forex.
1. Little Trading Experience
Like any new skill, Forex trading involves learning the ropes, which is primarily based on trial and error. It is of course, inconvenient and inadvisable to master the ins and outs of a trade by putting one’s savings at risk, which is what many newcomers do.
For this purpose, brokerage companies provide practice accounts to their users so they can hone their analytical skills and make better predictions while gauging the markets. Forex brokers like ETX Capital offer demo accounts to clients where they can trade money without actually losing funds. In order to traverse the Forex learning curve, novice traders are expected to take this account seriously and take calculated risks.
In case of loss, they do not actually lose their capital and can also analyse why the loss occurred. For a better trading experience, ETX Capital also offers free seminars and webinars to their novice users to get them better acquainted with the Forex trading environment.
2. Poor Money Management
In the hopes of getting rich overnight, most traders put more money at stake than they can afford. After consecutive losses, they end up with low balance and soon, a margin call follows. For example, if a participant with 1000 GBP invests 10% of their capital and loses five times in a row, they end up with 592 GBP—which is approximately 40% loss.
However, if this person had invested 2% of their capital and lost five times consecutively, then there would have been only a 10% loss in their account. Proper money management is thus, critical to cautious trading, especially if the need is to test the waters.
3. Using High Leverage
It is unwise to increase the leverage if a person is a beginner in Forex trading. Leverage is a double-edged sword that amplifies both profit and loss. With experience, you may however, gradually increase the leverage and use it wisely to execute profitable trades. Seasoned traders can handle this sword well and benefit from it, but in the hands of a novice trader, they are more of a danger unto their own money.
4. Poor Risk Management
Failing to include stop-loss measures can deplete a trader’s account before they know it. It is good practice to include stop-loss instructions in one’s account and set it to a threshold rate. If the rate declines below the threshold value, the stop-loss instruction sells the position on default. This way, the risks are mitigated and the account is spared from a destructive loss.
The mindset that causes many newcomers to lose frequently in Forex trading is that they treat it more like a gamble than trade. The greed for winning “the lottery” propels an average trader to make ridiculous trade decisions that cost them their life’s savings in the first few months of trading.