Why people struggle with forex trading
In a place where money makes the world go around, it is no surprise to learn that on average, $5 trillion are traded on the foreign exchange market every day. Enter forex trading, short for foreign exchange trading, a global marketplace for exchanging national currencies. You can buy, sell, or exchange one currency for another for different purposes such as trading, commerce, or tourism.
Forex trading can be very tricky and 95% of the time, forex traders fail. Why? Here’s a brief list of the reasons:
1. Not enough knowledge of the market
Many people go into forex trading without knowing the first thing about the foreign exchange market. This creates a chaotic environment for the trader who will eventually get overwhelmed by everything and lose motivation after not “becoming rich overnight” as they initially thought. There needs to be a good understanding of the market, the currencies at hand, and a general overview of the various factors that could affect the price of the currencies being traded.
2. No trading plan
Successful traders know how important having a plan is. Traders must treat their trading as if it were their own business because essentially, it is. You are putting in your money, your time, and your effort so it is a basic requirement to have a trading plan in place. You must evaluate and screen currency pairs (i.e. the two currencies you will pin against one another) to determine the risk at hand. You can then set long and short-term investment goals and set a timeline for reaching those goals. You must also map out which trading system you plan to use and align it with a trading strategy, which we’ll be talking about next.
3. No strategy whatsoever
To ensure your losses stay at a minimum, you need to set out a trading strategy. The best way to do that is through a process called “backtesting,” which is taking a strategy and testing it on the charts using data from previous years. You should backtest across different instruments and currency pairs, for different time periods, and for a variable number of trades. If you found that out of 50 trades, 40 were losses and 10 were profitable, does that mean you should wipe out the strategy from your list? Well, you should probably do the exact opposite of what you are currently doing, and you will get yourself a great strategy. Backtesting is essential because it does help you manage expectations and adjust accordingly.
4. Excessive use of leverage
The foreign exchange market allows traders to unreservedly leverage their accounts, meaning even if one enters with limited capital, they can still achieve substantial returns. However, traders tend to forget that it is in their best interest to limit the amount of leverage used. Trading large lot sizes and using high leverage may seem tempting at first, but when the initial capital invested is too small, the psychological pressure may get the best of you. You must carefully balance leverage and trade small lot sizes to ensure your account has enough capital in the long run.
5. Lack of proper risk management
Many forex traders fail because they put in money they cannot afford to lose. That should never be the case. Do not invest money you would fall apart without. Manage your funds efficiently to avoid losing unnecessary money and use lot sizes based on your risk tolerance.
If you’re looking for some help in the world of trading or don’t know where to start, get in touch with Tradepedia today. We offer learning, coaching, and mentoring programs of different kinds. Through a series of thoughtfully designed step-by-step learning modules, methodologies, and tools, we will help you take your trading game to another level.