Why do Traders Lose Money?
Some time ago, I met a lady on a social platform. She was a forex trader who was struggling to make a consistent profit, for a long time she kept on gambling her money away until finally she lost everything in her trading account.
It was so sad that she had lost her trading capital and part of her savings through forex trading, many people often find themselves in this situation of losing more than they earn, which prompt them to ask this question “why is forex trading so difficult?”.
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The problem is not with forex trading but with the people who trade forex. Every single day, money is either lost or made in the financial market. The one million dollar question is, how is this money lost or made in the market? One of the reasons is:
Placement of stop-loss:
Most people don’t know where to place their stops. Stop-Loss are very essential to traders, because they help limit the losses from exceeding the amount which the trader already had in mind to lose, if the trade should go against them.
Every traders should have a fixed amount which they are “perfectly ok with, to lose in each trade” and this is called money/risk management. How many times do we see traders that are willing to sacrifice the entire money in their account just for a few pips or dollar and most times they end up doing it- blowing their account and then find who or what to put the blame on.
Stop-Loss should be placed a little bit higher or lower on the “key levels” shown on the chart, these key levels on the chart depends on the type of position executed- whether BUY or SELL.
Key levels are vital areas where price keeps bouncing off. We can call these areas “Support and Resistance zones” just as I have illustrated on the picture below.
Support and resistance zones are often respected by traders (they are broken when held for a long time). A support zone can later become a resistance zone in the future as price keep hitting that level, also a resistance level can become a support level when broken; placing your stops around those levels can reduce the rate at which they are hit.
The Trend is your Friend:
How many times have you heard the statement “the trend is your friend”. This is because in forex trading the trend is really your friend and you should never try to make it your enemy.
Never make the mistake of “counter trending” (as I like to call it), trading against the trend- that’s the quickest way to kill [blow] your account.
There are two types of trends:
A trending market can be seen on all time-frames, I always recommend the daily time frame if you want to see a clearer picture of how the market is acting.
Short Trend are trends that do not last long and are dependent on the time frames for example a short trend on a daily time frame can be a long trend on the 30 minutes time frame or might not be seen on the weekly chart, that’s why I always advice traders to use the dailies so as not to get confused by seeing false trends.
Unlike short trends, which are dependents on the time frame and do not last every long. Long Trends are caused when the outlook of a currency is either good or bad and that forces traders, investors, hedge funds and institutional traders etc. to buy or sell which will result in an upward trend or a down ward trend.
Selling when the trend is going up or buying when it is going down is very tempting especially to new traders.
We understand that what goes up must come down and vice visa but one cannot tell how deep down it will go or how far it will keep trending up. It is good you enter into a trend as soon you identify it (I will write more on identifying a trend).
Most traders make the mistake of entering into a trending market late because of “fear”. When i am fully convince that a market is trending I jump right in with my slop loss placed and I forget about the trade, I do not get into a self-doubt or let fear conquer me; there can be only two outcome in a trade either a winner or a loser, so I see no reason bothering because with a good money/risk management my wins will always be greater than my loss.
In summary, “placing stop-loss can also be in pips” especially when there are no “key areas” or the “Support and Resistance zone” keeps getting broken (which sometimes happens as price never move in a straight line, see the picture below)
Using a small Stop-loss will always result in your trade being a looser because price will keep testing every “point” on the chart. Setting a Stop loss of 100-200 pips indicate that if the stop-loss is hit, then it means that, yes! This trade was a bad trade.
Many at times we get battered by emotion that we just give up, especially when flowing with the trend. A trend will not come knocking on your computer, saying, hey! Am a bullish or bearish trend. I see traders spending so much money buying complex indicators that will aid them in fining a trend. Every forex trader can identify a trend from using the HH, HL, LL, and LH or using simple indicators such as Moving Average down or Pivot Point etc.
Fear, self-doubt and impatience will never allow a trader to get the best from the market, until these emotions are eradicated from us, we cannot move forward and we will keep losing like that lady I met online.