Reasons why most traders lose money

5 critical reasons why most traders lose money

“Why do I keep losing money?”

 

This question used to keep me up at night.

 

Have you ever wondered this too? I have, over and over again.

 

Losing traderWhen I was still struggling to become a profitable forex trader, I was desperate for the answer. Not only that, I wanted to identify the various pain points that made forex traders lose money. Find a structured way to tackle them. I wasn’t going to be a losing trader forever, no way. So I started researching.

 

 

Why do traders lose out?

 

The short answer is of course because it’s really hard to be consistently profitable.

 

But why? There are enough traders with a proven track record, so it must be possible. During my search, I’ve identified 5 of the most important reasons why traders lose out. I’m pretty sure that at one point or another, I’ve been through them all. But once I started working on them, I noticed a real turnaround in my trading performance! I couldn’t believe this, it really worked.

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Familiarising yourself with common trader mistakes will allow you to improve yourself much quicker.
Know your weaknesses and be one step ahead of the others.

 

Here are the top 5 reasons why most traders lose out (including actionable strategies to fix them):

 


 

The top 5 reasons why traders lose money

 

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The easiest thing to handle is winning, but trading doesn’t start until you lose.

 

1. Poor risk management

 

Risk managementWithout a doubt, this is the number one on this list. People just risk way too much. Forex is leveraged trading and it’s incredibly easy to wipe out your account by risking much more than what you can afford. Even world class traders such as William Eckhardt says he will not risk more than 2% of their account balance on a trade.

Then why would you?

 

How to fix:

 

 

2. No discipline

 

discipline

 

Discipline is something that is often overlooked in the forex ocean of indicators, trading strategies and forex signals. But discipline is so incredibly important. Once you reach a decent level of forex knowledge, this is what most of us will be struggling with. So many people jump into trades, just to feel the excitement of being in a trade. Or maybe you’re often widening your stop loss or taking profits too early?

 

Therefore, it’s important to have a clear image of what you want to achieve in a trade, and stick to it. Learn about trading psychology and how things like cognitive biases will influence your trading behaviour.

 

Poor risk management will wipe you out quickly. No discipline will do the same, only slower.

 

How to fix:

  • Be aware of the fear of missing out and cognitive biases that are into play. Just by knowing about it, you will be less inclined to make impulsive trades.
  • Have a “game plan” for each and every trade you take. Know in advance where you will enter, what your stop loss and take profit will be. Know which conditions will invalidate your trade.

 

 

3. No structure

 

Chaos

 

There are so many traders that just randomly enter trades and don’t really know why they took a given trade. It’s bad for 2 reasons:

  • First, since you have no record of your trades, you can’t figure out what works or what doesn’t. How are you going to analyse your trading performance if you impulsively trade whatever you like? It’s a recipe for disaster.
  • The other reason is that you will hold yourself much less accountable if you don’t have a clear trading plan and journal in place, so you’ll be much more likely to just try something.

 

Many traders lack structure. A trading plan and journalling every trade can provide that structure. After years of trading, I still use a checklist to see if the trade I’m taking is according to my trading plan. As silly as it sounds, it works.

 

How to fix:

  • Have a trading plan. If you don’t have yet, start working on one immediately!
  • Journal your trades. It will be a record of your trading performance and allows you to analyse and improve.
  • Use a trading checklist before every trade. This is what might be on it (feel free to adapt to your needs):
    • The trade follows my trading plan.
    • I’ve noted down the trade in my trading journal.
    • The trade follows the longer-term trend.
    • I’m not entering this trade because I’m bored or afraid to miss out.
    • I know my entry and exit criteria. I know my SL and TP.
    • The risk/reward and position size is sufficient.
    • I feel convinced about this trade.

 

4. Strategy jumping

 

Changing directionThis is one I see a lot with beginning traders. They want to try some new strategy. After 3 trades, they figure out it’s not working and jump to another strategy.

 

What most traders forget to realise though, is that you need time to make a strategy your own. This doesn’t happen overnight! You have to learn the ins and outs, figure out what works and what doesn’t. Try out the strategy over a long enough period of time to make it statistically relevant. A lot of traders would see much better results if they only stick to one strategy. Unfortunately, most traders are looking for the holy grail, lose interest way too fast and change direction.

 

How to fix:

  • Learn a trading strategy you believe in, and stick to it for a while. Your trading performance will improve as you go along and will make the strategy your own.
  • Same goes for indicators. Indicator overload also makes for bad trading decisions, so try to keep it simple.

 

5. Perseverance

 

PersevereEven though you have tackled all of the above reasons why traders lose, it might still take some years before you “get it” and become profitable.

Research has indicated that 80% of traders quit within the first two years 1. Don’t expect forex trading to be something you can pick up in an afternoon! Treat trading as a business. Study, put in the hours, take it serious and above all, you should love trading. You’ll see that if you stick around long enough, results will come.

 

How to fix:

  • make trading and learning about forex trading a habit. Only by persevering, you’ll reach a level of profitability
  • Treat trading as a business. It will take time, but the potential pay-off is totally worth it.

 

Good luck trading!

 

Are you struggling with something? What has had the most impact on your trading performance? Let us know in the comments!

 

1 Barber, Lee, Liu, Odean – Do Day Traders Rationally Learn About Their Ability? (2010)

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Felix

I'm a full-time, independent forex trader. I've been trading for over 10 years and specialize in price action trading, reversal trading, trading psychology and algorithmic trading. If you're determined to become a pro trader, I offer select consulting and coaching services. When I'm not trading, I'll either be travelling the world or rock climbing (likely both). Read my story here.

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