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Almost all seasoned forex traders have been through tough times where multiple losses seem to come out of virtually nowhere. This phenomenon can cause substantial distress, especially among those new to trading forex. If you lack a prudent money management strategy, then losing money in that way could quickly put you out of business.
Professionals already know that a string of losing trades can occur, so they generally include a money management component in their trading plan to deal with just such an event. A decent forex profit strategy will usually include a position-sizing component and where stop-loss orders should be placed to best manage your risk of loss. Read on for more information on this important topic for forex investorss.
Why Do Most Traders Lose Money?
The majority of people who start trading forex lose money, so it’s important to start off on the right foot. The main reasons that traders lose money when trading currencies tend to fall into several categories. The more common of these reasons are listed below.
Lack of Knowledge
Knowledge is power, and nowhere is the saying more true than when trading in the foreign exchange market. Currency valuations and exchange rates depend on economic and geopolitical events in the countries represented by both currencies in a currency pair, so the more informed you are on these subjects, the higher your likelihood of making a profit in foreign exchange.
No Well-Defined Trading Plan
Any seasoned forex trader will advise you to trade with a plan. Trading without a tested and profitable forex trading plan is like starting a long trip without a map; you’ll be directionless in the foreign exchange market, which could cost you a significant amount of money unless you happen to be very lucky.
Emotional involvement with trades is the downfall of many forex traders. While making profits can be emotionally satisfying, most people fear losing money, which makes fear and greed the two most important emotions to control when trading. The most successful investors have a dispassionate attitude towards gains and losses and stick to their trading plan, which avoids getting overly emotional when trading.
Poor Money Management
A money management component to your trading plan is essential to making consistent profits as a trader. To make money forex trading, you typically need to break down your account into trading units and seldom risk more than a certain percentage per trade. Prudent money management, including stop-loss orders, has saved countless traders from ruin.
11 Tips for More Profitable Forex Trading
Most retail forex traders do not make money, so to become one of the profitable ones, you need to start off on the right foot. Benzinga has compiled a list of 11 tips to help improve your chances of trading currencies profitably.
Study Forex Trading
Before you start doing any currency trading, you need to do your homework. This means learning about what moves the forex market and how to operate successfully within it. You’ll also want to develop and test a sensible forex strategy that has a decent chance of helping you trade profitably.
Work with a Reputable Professional
Not all online forex brokers are created equal, so forex traders should choose one that has a good reputation and oversight from a major regulator to avoid losing their deposited funds to a scammer. If you live in the United States, you’ll want to open an account with an online platform that is a member of the National Futures Association (NFA) and is registered with the Commodity Futures Trading Commission (CFTC). For example, a financial advisor can help take emotion out of the equation, can guide each investment, will help cut out every little fee, seek out the best price for your situation and explain how each currency pair will benefit you or detract for your investments.
Learn to Trade with a Forex Demo Account
A practice or demo account lets you test out trading ideas and methods without putting actual money on the line. Practice accounts let you learn to trade and can potentially help you avoid losing money from beginner’s mistakes. When you practice, remember to check the margin interest rate you might encounter, research currency pairs and limit your speculation to investments you understand. The foreign exchange market can be quite volatile, and everything from the Japanese Yen to Pound Sterling, USD, the Canadian Dollar, New Zealand Dollar, Euro and the Singapore Dollar. Accumulating wealth takes time, and practice is a good first step.
Know When to Accept Losses
Sound money management techniques include the need to take small losses from time to time to eliminate the possibility of taking even bigger losses in the future. You can often enter a forex trading position at any market exchange rate and still make money if you know how to get out of the trade properly.
Keep Charts Clean
Keeping things simple and effective when you are performing technical analysis means you can generally make faster trading decisions. This practice will not only let you take advantage of more opportunities when trading forex, but it can also prevent losses from getting out of hand and keep trading tools and your forex account organized. The technical analysis you complete can tell you quite a bit, but taking these steps first can be even more powerful, especially when you feel justified to make a specific investment.
Start Small When Going Live
Practicing in a demo account cannot exactly simulate live retail foreign exchange trading because of the emotional involvement you experience when your money is at risk. Avoid getting overly confident by putting large sums of money on the line right off the bat since that can result in larger initial losses. Instead, start small when you’re first trading in a live account and progress to trading bigger positions over time as your confidence increases. The financial market takes time to understand, but this slow growth plan teaches you how to use data, how to build a trading strategy and how supply and demand impacts forex investors.
Keep Your Emotions Out of It
Your emotional reactions cannot be fully prepared for and understood until you experience trading in a live environment. When you get emotional, you may overlook vital aspects of trading, so do your best to develop an objective trading system to avoid having emotional responses impact your forex trading decisions. The spot market doesn’t care about anyone’s feelings because it can only react to the volume it experiences. Even if you’re watching the spot pricing of currencies to judge the bond market, you want to keep emotions out of it because of the range of factors that are at play.
Use Reasonable Leverage
Most experienced traders think of leverage as a double-edged sword since it can magnify profits as well as losses when trading currencies. Make sure you use reasonable leverage ratios when trading, which can vary depending on what sort of trading strategy you use. Proper investment management requires you to consider the cost of trading and market sentiment before taking such a risk.
Make Record Keeping a Priority
Keeping good records when trading can help you identify reasons why you remain unsuccessful so that you can address them. For example, you might need to alter your trading behavior significantly or update your strategy to account for a change in market conditions. You can keep trading records in a notebook or a spreadsheet, or you can use professionally developed trade journaling software, such as that provided by TraderVue. Reducing forex exchange risk is much easier with proper records, and you can even complete a fundamental analysis of your records to see broader trends.
Treat Trading Like You’re Running a Business
Keep in mind that individual wins and losses do not matter that much in the short run. To treat your forex trading activities more like a business, you first need to have a plan. You should also focus on how your trading business will perform over time and aim to achieve consistently positive long-term results from a well-defined trading strategy. Just as you wouldn’t overstock a singular product, you won’t go wild with one technical indicator.
Get Educated on Tax Implications
It makes sense to educate yourself on the tax treatment and implications of your forex trading activity so that you are prepared at tax time. This action will help you avoid nasty tax surprises and let you take advantage of advantageous tax laws. Consulting a qualified accountant or tax specialist can help you develop a plan to minimize your tax liability when trading forex.
Knowledge and Planning
To avoid losses in forex trading, traders need knowledge, a trading plan, emotional control and money management. They should study forex trading, work with reputable brokers and practice with demo accounts. You should be ready to accept small losses, keep charts clean, start small when going live and control emotions. Using reasonable leverage, maintaining good record-keeping practices, treating trading as a business and being aware of tax implications also contribute to long-term profitability. Following these tips can increase your chances of success in the forex market.
Benzinga’s Top Forex Trading Platforms
To trade forex online as a retail investor, you will need to use a forex trading platform supported by an online forex broker. Benzinga has taken some of the guesswork out of selecting a decent currency trading platform by creating the following comparison table listing some top forex trading platforms.
- Best For:Mobile Userssecurely through Plus500's website
- Best For:Forex Trading in and Outside the U.S.securely through Forex.com's website
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
- Best For:Non US Forex Tradingsecurely through AvaTrade's website
- Best For:Fixed Spreadssecurely through FxGlory's website
- Best For:Forex Executionsecurely through IG Markets's website
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
- Best For:Demo Accountssecurely through eToro Forex's website
CFD trading is not available to U.S. users. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
- Best For:Forex Tradingsecurely through HYCM Capital Markets's website
Frequently Asked Questions
Can I lose all my money in forex?
If you put money at risk by taking a position in a forex trading account, and the market moves against you, then you can lose all of that deposited money. If your account does not have negative balance protection, then you may even owe additional money to your forex broker depending on where your losing trades were automatically closed out.
Do Forex brokers want you to lose?
It depends. Forex brokers that also operate as market makers can benefit financially from the market moving against any positions you establish that would cause you to lose money. In contrast, online brokers that use a straight-through processing, and electronic communication network models tend to benefit more from you making money since that means you might continue trading, which will result in you paying them commissions and widened dealing spreads over time.
Can you earn a living day trading?
Most professional day traders operating at major financial institutions make money for their employers, and they get paid a decent salary and a performance-related bonus for doing so. Some retail traders might manage to earn a living from day trading but most do not.
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About Jay and Julie Hawk
During her financial career, Julie developed world-class expertise in technical analysis, including Elliott Wave Theory, and was deeply involved in initiating research into automated trading and trading signal systems. As a member of the San Francisco Writers’ Guild, Julie regularly wrote trade strategies, educational material, market commentary, foreign exchange newsletters, reports, articles and press releases. In addition, Julie was interviewed for various financial markets magazines and news wires in her professional capacity as a forex and derivatives expert. Since retiring from working at banks, Julie has been writing and editing books and articles about financial markets for companies like Benzinga, as well as trading forex online and mentoring other traders as part of TheFXperts’ financial team.
In addition to trading stock index, forex and commodity futures and options professionally on exchange floors, Jay also has experience trading stocks and options for private investors and trading forex online for his own account. He has also developed extensive experience in performing and using fundamental economic and corporate analysis to inform his trading and investment activities. Jay is also an expert financial writer with particular expertise in reviewing online brokers and investor services.