The 5 Reasons Why Most Traders Fail in the Forex Markets
Why Most Traders Fail Reason 1: Trading without an edge
There is a famous saying in poker: “if you sit down at a poker table and don’t recognize who the sucker is, then it is you that is the sucker”, and so too in the financial markets… Trading is a negative sum game: for every winner there is a loser and both pay to play. To be a profitable trader you need to have an edge. If you have no edge and choose to trade then you become the sucker that profitable traders extract their money from. For More information on how to Build an Edge in the Forex Markets see our Forex Strategy Pages.
Why Most Traders Fail Reason 2: Trading too large for an account size
Many amateur traders and a few so called professional ones take a gun slinging ‘all or nothing’ approach to trading. The problem with trading too large is that it is only takes one adverse move to wipe you out or put you seriously underwater. No matter how good the system or trader, nobody acting on legal information can guarantee the next trade will be profitable. History is littered with examples of traders wiped out by this ‘can’t lose’ mentality: Nick Leeson of Barings, Long Term Capital Management, Jerome Kerviel of Soc Gen, Kweku Adoboli of UBS to name but a few. The only certainty in the financial markets is that there are no certainties. Size trades accordingly.
Why Most Traders Fail Reason 3: Obsession over winning percentages instead of positive expectancy outcomes
Most beginning traders focus on winning percentage as a measure of success. They falsely believe higher winning percentages equate to greater returns in the financial markets. End result: losing trades are held too long in the hope of a turn around, winning trades are closed too quickly to book sure profits. This approach is fundamentally unsound. To illustrate the point imagine a system with 95% win rate and wins 0.5 % on every trade… Sounds great… but what if we told you it loses 80% of your capital on losing trades. Many traders are employing systems and strategies such as this one without even realizing: they are sat on time bombs waiting to explode.
Why Most Traders Fail Reason 4: Over-trading and using too tight stops
Commission is a cost of doing business, the more you trade the more commission and slippage you pay. Many traders are over-trading and ‘churning’ their accounts. Stops are often set too tight in an attempt to maximize leverage while controlling risk. This helps to contain the size of the loss as a percentage of an account, however it is ‘death by a thousand cuts’. Over time these accounts eventually fall to zero.
Why Most Traders Fail Reason 5: Guru-itus and acting on false beliefs
‘Guru XYZ said it was going to do this, so it must be true!’. This is a very dangerous way of thinking and can create devastating results for traders and investors of all sizes. One of Keynes most famous quotes was that ‘markets can remain irrational longer than you can remain solvent’. No matter how rational or irrational the market, it is always the market that determines whether you make a profit or loss. Everyone gets to choose what they believe in the market: be careful what you believe.
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