Dear reader,
In this article i will continue to dig deeper on some important reasons why FX traders fail. I really believe that it is a must for any successful trader, to learn how to protect him/herself from losing and/or keeping the pips they have made before anything else. A friend of mine often says that if you want to win when playing Fifa, first of all you must learn how to be a good defender and not allow any goals, and only then how to score. Of course that applies to most sports.
Actually if you think about it, it makes a lot of sense even when applied to forex trading. Worst case scenario would be for you to NOT make pips, meaning – break even. Next step is to learn how to make pips and keep them. If you go the other way round, you are about to experience what i call the emotional and financial roller-coaster. You will be making money, then losing them. This will drive you nuts and eventually you will start making more mistakes then profitable decisions, which inevitably will lead to losses.
Don’t take my words for granted. I’m only talking from my experience as a trader who has been through that and as a mentor who sees what my students are struggling with. I’m only asking you to consider it.
There are so many alogical facts in this business, that it keeps surprising me even today, and i’m already considering myself a veteran trader. There are only 2 ways (actually 3 but 3rd one is neutral) the price could go. Up and down. Yet over 90% of the traders fail to make money. How is this possible? It doesn’t make sense but it is a fact. Of course third option is, price stays flat, which is neither making you money nor you are losing. So yes it is alogical but probably this is why we all love it so much.
Now the first thing i want to discuss is knowledge.
Fact #1 – LACK OF PROPER FX EDUCATION
I believe one of the strongest reasons why people fail is the lack of proper, quality education. I do have a few theories why that happens.
First of all the nature of the business is such, that it predisposes future traders to underestimate the importance and weight of education. Just because it all about two buttons – Sell and Buy – it doesn’t mean it is so simple. It may look like it but it is not. People who want to be traders fall for it. I have seen it many times and i’m pretty sure I will see it again.
If you are a person who is just starting to trade, please take my advice and don’t underestimate mr. Market.
Another possible reason is that there are too many, and I really mean too many educational materials out there. This creates a pool of confusion and uncertainty. When a “trader wanna-be” falls into that pool he or she is drowned in information. You don’t know what to believe and what not to. Everybody is promising you the stars. Follow my 2 arrows and you will become a millionaire in 3 weeks.
After you burn some cash on such “wonderful” systems/indicators, and you blow up your first, second, maybe third account (it all depends on how insistent your are 🙂 ) you will come to realize that this is not working. Something is wrong and you must change the way you supply yourself with education.
This is when you start digging deeper. Asking for performances. Looking into forums etc… It is terrible i know but very few of us, have found the right teacher/course from the first try.
To be successful you should realize that you must lay good educational foundations, that you can later build on. You should start with the basics – what is pip value, what is the forex market and how does it work, what is leverage etc. You can’t build a house starting from the roof, as it will fall onto your head.
Fact #2 – LEARNING TOO MUCH, TOO FAST
Try to read five medical books in a week or two, and then perform a surgery. I wouldn’t want to be the guy under your scalpel, this is for sure! It is that simple. It is great that you want to learn as much as possible but don’t go crazy learning it all at once. You should devote some time for practice (some = as much as needed before you master whatever you are learning). Go step by step.
Babies first sit, then start crawling, then they stand on their feet for a fraction of second, then they stand for a few seconds, then they start slowly walking while mommy is holding them etc.. You can’t expect to swallow all the available information you can get your hands on over a weekend. That info will turn into an informational mosh-pit inside your head.
If you read 10 books about medicine, you can’t make a surgery right after that, right?
If you hold a tennis rocket for first time, you won’t beat Federer tomorrow, right?
You got my point.
Build up your knowledge smoothly. Learn, practice, learn, practice.
Fact #3 – TRADING TOO MANY INSTRUMENT SIMULTANEOUSLY
I will repeat myself again – Trading more doesn’t mean making more money. I really want you to remember and trust me on this one. Trading more only means exposing yourself more frequently, taking trades that are not the best setups you could’ve found. Trading more means losing more frequently most times.
Try to stick to a list of instruments that you like for one reason or another (low spread, trending pairs whatever floats your boat). Make a list of 5-10 pairs. Maybe even 15 if you are trading the higher time frames. Now that you have that watch-list, follow it. Hard part is to pick only the very best setups and opportunities the market will offer you.
How to determine the best setups?
Very very simple – you have a strategy and rules that must be met, before you take a trade. When you look at the setup it shouldn’t take more than 10-15 seconds for you to say YES. 1 – check, 2-check, 3-check ok this trade setup is valid i will take it. If you have to switch to another time frame (which is not part of your system), if you start adding indicators to get extra confirmation (which is not part of your system’s rules) if you start wondering, “is this really a divergence? could be, could be not” – SKIP IT. This is not the best setup you want to be in. Yes of course it could be a winner, but let’s not forget it is a 50-50 game right ?
You don’t want to rely on luck. You want to have an edge. You want to take conscious, well-grounded trading decisions. This is when, even if a trade fails, you still feel good. You know you did your part of the deal. That trade turning into a loser is part of the statistics. Nothing more. You live in peace, and sleep like a baby.
On the other hand if you bend the rules, and you lose, it will be a different story. Even if you don’t say it out loud. Even if you try to justify this entry, you will know that this was not by the book. You could’ve skipped it.
Here is a life example – try to take your kid to kindergarten, wash the dishes, clean the house, get ready for an important meeting with a client, cook lunch, walk the dog and take the car to the service. Try to do it by noon, try to do it by the evening…you will most likely fail, if not in all task then at least at half. Spread your challenges. Don’t fight all battles at once, you will lose. You can’t follow, trade and manage all currency pairs and other instruments that you have available in your platform. Pick your battles and you will have a greater chance to win!
Bottom line: try to find a reason why not to enter a trade, because there are always 10 reasons that we can spot to justify this entry and make it a valid one when it is not.
And here is a good one. As my good friend likes to say – Never cry for a losing trade or trade you missed, we will have enough time to cry because of the trades we took and hold.
Joke aside, don’t let it become a reality. In order not to cry out trades you did take, you have to learn to filter your setups. Less is more.
Fact #4 – RUMOR HAS IT…
Rumors are one of your worst enemies in trading. Rumors are cancer for traders. Same thing is going on just like with the education. There are so many news, analysts, shows, experts that you can never get ahead of it. Sometimes rumors will tell you 10 different things about the same financial instrument. Which one is the correct one? Maybe 3 out of 10 hold some truth?
Sometimes 10 out of 10 will tell you the same thing – SELL. History has proved itself that these are the moment when you have to BUY! Why does it happen like that? Because when there is a panic (media tells you sell, sell, sell) you start selling. A housewife is listening to the news while cooking..do you think she will make her own analysis when she hears the news? I doubt it.
We are not that housewife. We are not even her husband! We are traders! We make our own analysis and listen to what the chart is telling us. We respect other people’s opinions but we have our OWN opinion.
Occasionally we will be wrong but it is better to lose because of our analysis, not because somebody else told us to sell or buy. Why? Because when you make your OWN mistakes you grow up. This is how life works. Mistake, step up, success, mistake setup up success…
If you make mistakes because of someone else you don’t learn anything. Nada, zero, zilch!
A trader has his strategy, proven to work, he also has money and risk management and he follows them. A real trader doesn’t trade the rumors, he rather trades the facts.
So as trader, you better trade. And don’t listen to analysts trying to predict rather than trade.
There is wonderful saying about the difference between analyst and trader.
It goes like that – Trader is trading today the trades that the analyst will talk about tomorrow.
Fact #5 – OVEREXPOSURE IN THE FX MARKETS
If you are sick of listening about it, please bare with me a few more lines till the end. You have heard it a thousand times, you have read about it a thousand times and again I see people overexposing themselves and kill their accounts in a few trades.
A good example of overexposure is when you trade mirrored instruments (be that may positive or negative correlation) For instance USDCHF and EURUSD pairs. They are negatively correlated. What that means is when one goes up, the other one goes down and vice-versa. I will not go to explain correlations and why it happens BUT it is a fact.
Now when you open a sell in USDCHF and at the same time you open a buy in EURUSD you are overexposing yourself. If you usually risk 1% per trade, now you have risked 2%. Yes if it goes in your direction you will make double profits, but what if it goes against you? Leave the percentages, think of it in money. If you risk risk $200 per trade you can now lose $400. It will hurt you and you will bleed. End of story. It is wrong.
Another example is over exposing yourself to same currency. For example, go short (sell) on USDCAD, GBPCAD, EURCAD, AUDCAD, CADJPY etc…. WHY to expose so much to one same currency, the Cad? Because it provides good setups? And what is it is a trap and you will get SL on all trades? Doesn’t make any sense, right?
There are other pairs like that highly correlated which you should learn not to double expose yourself to. You can do a quick google search and you will find website where you can see the correlated pairs. Here is a screenshot of Oanda’s tool:
That’s all for this article! I hope I made you think. Think about your money. You control them and it is up to you whether you will make money or lose money.
I will be glad to hear your comments on the subject! Let me know what are some other reasons why traders fail in your opinion. Comment section below is all yours!
Of course if you like the article please share it!
Yours,
Vladmir
