10 Reasons Why Traders Lose Money in Trading
Retail traders are individuals that speculate on financial markets and usually lose money.
This is risky business, especially trading the currency market, where few retail traders survive the test of time.
We’ll try to look at some (ideally all) of the reasons why traders lose money to find out how to improve the trading process.
Online trading became popular with deep Internet penetration worldwide.
Every day more and more people get connected and get exposure to online trading.
The industry faces stiff competition among Forex brokers.
For this reason, as an individual connected to the Internet, it is impossible not to be the subject of online trading advertising.
The affiliate industry is enormous as well, as the currency market, by its size, attracts all kinds of people.
Think of the numbers for a bit: five trillion plus dollars change hands every day on this huge market.
Also known as the interbank market, it formed in the early ‘70s with the United States decision to scrap the gold standard.
It grew together with globalisation to the extent that makes today’s financial system interdependent.
The Advance of Technology
Up until early 2000, the costs of trading financial markets were prohibitive.
This was especially true for the interbank market or foreign exchange as we know it today.
However, competition and improved technology changed the industry forever.
Nowadays, with only a few clicks and a stable Internet connection, literally, anyone can trade worldwide markets.
From currencies to bonds, stocks, options, and so on, trading has never been more accessible.
But statistics tell that the retail traders have a hard time making money on the currency market.
Do traders lose?
In fact, over ninety percent of retail traders lose their first deposit to a broker’s account. Why do traders lose money?
Why Traders Lose Money?
As always, the solution to a problem is to recognise there is one.
As mentioned earlier, numbers don’t lie, and, in this case, the reality is cruel.
With this article, I aim at covering the reasons why traders do fail when operating on the currency market.
Everyone must know what to do to avoid, as much as possible, mistakes or habits that end up with losing money in trading.
While not in order of their importance, here are ten reasons why traders lose money in trading:
Online Trading Advertising
Like any competitive marketplace, the online trading industry is full of all kind of companies.
From outstanding brokerage houses to crooks and scammers- you name it.
For this reason, there is a dog-eat-dog world out there in the run for attracting as many traders as possible.
Therefore, trading the currency market is advertised as being a piece of cake.
After all, what is so difficult in deciding to go long or short and make an extra buck to complement your monthly income?
Commercials showing the lady working in the grocery store gaining $2000 extra income per month do no good to the industry.
People are of all sorts and kinds in this world and easily fell prey to dishonest advertising.
Lately, at least in the US and EU, regulations imposed Forex brokers to disclose the true nature of the risk involved in every commercial.
Therefore, the guilt of losing money in trading belongs to the uninformed trader and not to the greedy broker.
Traders can easily overcome this by doing a bit of research about the broker and the overall online trading industry.
An informed decision is often the initial step to success when trading financial markets.
Human Nature – Greed and Fear
Human nature drives everything we do in our lives.
Some people have more patience than others.
Others are more risk averse than third, and so on.
In trading, things are no different.
For whatever the reason, human beings react differently to the idea of making money and losing money.
Everyone wants to make money instead of lose money trading.
Few understand or can cope with the idea that making money in the currency market comes at the risk of losing money in trading.
Therefore, there should be a fine balance between the risk taken and the potential profit.
But reality, again, plays tricks of us all.
When in profit and the market takes a breather and consolidates for a while, a small idea starts growing in traders minds:
why not taking the profit?
Slowly but surely the mind invents reasons why traders should do just that, take the profits, despite the initial plan being entirely different.
Suddenly, nothing matters anymore.
The fear of market reversing is a reason why traders lose money.
And Then the Trend Resumes…
Naturally, the moment the traders book the profits, the trend resumes, and another battle starts.
This is the battle on the psychological side of the trade:
why did I get out and how to get in?
The FOMO (Fear Of Missing Out) comes straight from fear and greed, as the reasons why traders fail.
Next thing you know the trader ends up buying the top or selling the bottom and the initial gains evaporate quickly.
To counter fear and greed and their effects on a trading account, plan your trade and trade your plan.
Stick to the plan, no matter what!
Failure to Understand the Other Market Players
Another reason why retail traders fail when trading the currency market comes from not knowing the counterparts.
For every trade, there is a counterpart.
For instance, if you’re buying the EURUSD pair, you can only do that from the ask price.
Someone else must take the other side of the trade, from the bid side.
And then the market moves…
Regardless of the direction, each position must be squared.
The long EURUSD trade mush be squared from the bid price, and the difference between the original entry and the exit is the profit or loss.
Again, at this level, someone else takes the other side of the trade.
Because the market is immense, positions squaring and paring always happen in the blink of an eye, with plenty of liquidity present.
The Other Side
But who are the ones on the other side of a retail trader’s position?
Other retail traders?
Possible, but unlikely.
The size of retail trading in the daily FX volume is super-small.
It covers only about five or six percent of the daily transactions concerning volume, with small variations depending on the trading day.
Hence, when talking to fellow retail traders and blaming each other for a loss or bragging for a gain, keep in mind that they have nothing to do with it.
They didn’t lose because you gained, or gained because you lost, as most likely someone else sat on the other side of the trade.
Commercial and central banks, for instance.
Central banks set the monetary policy for the period ahead and, sometimes, their decisions must be implemented.
Someone (i.e., a trading department) needs to buy the bonds on the market as part of the QE (Quantitative Easing) program.
Therefore distorting the financial market.
Commercial banks have treasury departments, exchanging the currency on the open market to fill their client’s orders to buy or sell currencies.
Both commercial and central banks run huge volumes on the market that dwarf the possibilities of a retail trader.
Not to mention that they have an army of researchers and the best possible technology to make the right trading decisions.
Other players, too
Forex brokers, liquidity providers, institutional investors, quant firms, etc., come to complement the list of other market players.
They have more chances to make money in the currency market than the retail trader.
Therefore, one of the reasons why traders lose is because they don’t align their interests with the big guys.
Doing that significantly increases the chances of making money in trading.
For many traders overtrading is similar with greed, as a result of taking too many trades to make as much money as possible.
However, overtrading is something else.
It appears when traders take too many positions at the same time, thus increasing the leverage (and the risk) on the trading account.
Next thing you know, the market barely moves in the opposite direction leaving the traders out of their positions.
Only then you see the market reversing…
The screenshot below shows the outcome of overtrading…
Do traders lose?
Lack of Understanding
Overtrading is one of the leading causes of why traders lose money.
It comes from the lack of understanding of the currency market and especially its correlations.
Currencies correlate, and especially currency pairs.
The Forex dashboard uses the USD as the pillar, and currency pairs have different correlation degrees.
For instance, buying GBPUSD, EURUSD, AUDUSD, and NZDUSD after bearish economic news out of the United States is not a smart decision.
It is more or less like taking one single trade with four-time the desired exposure.
It is, in the end, overtrading, because the pairs enjoy a direct correlation.
How to avoid this?
- Learn the most critical correlations.
- If you are to trade correlated markets, do that by entering/exiting a trade at a different point in time
- Possibly use a strategy on different timeframes on correlated pairs.
Lack of Money Management
Perhaps the most important reason why traders lose money is money management.
Or, more precisely, the lack of it.
Managing a trading account, despite the size, is a huge responsibility.
Things to consider with money management:
- volume to trade
- the currency pair
- the time of the day, week, month to take a trade
- the risk-reward ratios used
These are are only a few things that form of a proper money management system.
Lack of knowledge
The truth of the matter is that from the moment retail traders fund a trading account, they instantly become money managers.
The problem, though, comes from the lack of knowledge on the area and what can be applied to the currency market.
The problem here is also in that traders believe if they scatter 10 indicators on a chart, it will make their trading better.
Does that really look like so many indicators will improve your trading, too?
Will traders continue to lose using that approach?
Science and Art
Managing money is both a science and an art, and differs from market to market.
The stock market is different than the currency market.
The options market is not the same as the bond market…
And so on and so forth, money management differs too.
The Right Ratio
Trading the currency market, in general, has better results if traders use appropriate risk-reward ratios.
Never settle for a reward smaller than the risk and look for anything above 1:2 or 1:3.
Gaining two or three pips on every pip risked to use consistently in the Forex market.
Lack of Trading Education
On top of the reasons why traders lose money in trading listed in this article was not knowing who the other market participants are.
Equally important, lack of trading related education is a key factor that causes traders to lose money.
Trading or speculation on financial markets is centuries old.
We can track in the middle of 1700s in Japan rice traders speculating on future crops and their prices.
Late in the 1800s in the United States that stock market evolved into an object of general interest.
Technical vs. Fundamental Analysis
In the late 1900’s, the Personal Computer’s invention brought technical indicators as appropriate trading tools to use.
While learning from the past, the trader needs to stay up-to-date with everything happening around.
Both technical and a fundamental points of view are important, as well as the technological one.
Derived from greed and human nature, oversized bets is another reason why traders lose money in trading.
We want more and more, faster, and the market simply doesn’t move at such a pace.
As a result, retail traders take inappropriate risks, and a small countermove is enough to trigger a margin call.
Remember: To overcome this, use percentages on every trade coupled with appropriate risk-reward ratios.
Only because the markets are open doesn’t mean we should trade.
Sometimes the markets are just waiting for a reason to move.
There are plenty of examples available.
For instance, consider the NFP (Non-Farm Payrolls) week in the United States.
Most of the times the USD consolidates, as the entire trading community awaits the Friday’s release.
Therefore, if you are to trade during the NFP week, use a trading horizon that expands beyond the release time.
Patience and discipline are vital to growing a trading account. Lack of such qualities comes to the trading account’s detriment.
Lack of time
Time is another issue.
I may want to be a day trader, but my day job doesn’t allow me to watch the market.
I can only follow the markets for two hours a day after work.
Chances are I won’t be able to make money.
The currency market moves for various reasons, most of them fundamental ones.
Fundamental reasons relate with economic releases, spread during the trading hours, from different parts of the world, as the Earth moves.
In other words, the market moves all the time or has reasons to move all the time and change behaviour.
Therefore, affecting the trading account’s performance.
Lack of Screen Time
Sometimes merely the lack of “screen hours” is enough to transform a winning strategy into a losing one.
One way to solve this is to develop a strategy on the more significant timeframes.
Think of daily and above, and widen the time horizon for a trade to reach the take profit level.
Treating Trading as a Hobby
A critical factor that messes with the trading account is the reason why people trade.
Part of the risk disclaimer of every broker is that retail traders should not risk money they cannot lose.
Well, using that attitude won’t get a trader far either.
Of course, losing is possible, but the idea is to make money, not losing them.
Trading is not a game, even though sometimes the quotes changing fast may suggest that.
Trading is a serious business, with tremendous opportunities, but significant risks too.
What About the Effort?
If treated as a hobby (i.e., I don’t care what happens, I don’t care if I lose), the trader won’t put the effort needed to succeed.
And, to make money trading, the currency market requires a lot of time and effort.
It does require much more than the time and effort in a hobby.
Trading for a Living for a While*
Again, there’s a quick fix to that too.
One way is to try trading for a living for a while.
Yes, that’s correct.
Put some money in a live trading account and imagine you pay all your bills and cover all the expenses with what trading gives.
After six months or so, no one will treat trading as a hobby anymore.
Everyone reasonable will put enough time to succeed, and invest both in learning more and act appropriately.
*This option does not encourage you to leave your jobs. In fact, try to do it simultaneously.
As we listed some of the reasons why traders lose money in trading, the root of the problem is the focus.
With attention on making money, traders end up losing.
How about focusing on how NOT to lose money, and you’re better off from the start?
Succeeding in NOT losing money ends with making money.
With the thought that this article brought some clarity to many retail traders, there’s no better way to end than asking the right question.
Are you meant to be a trader?
Have you checked out my article on Trading Discipline?