Studies have shown that 80% of forex traders lose and Pay 20% that win. Then 95% of those that lose quit after their first loss, leaving only 5% which continue and later join the 20% winners with more experience.
What does these figures portend for would-be forex traders?
The simple way of putting these stats is to say that out of every 100 forex traders, only 20 would be in profit, 4 would lose, but continue trying till they are good at it and the rest 76 would lose and quit trading for life. The basic question now is:Why would too many traders lose?This is a big question. But the simple answer is:The 80% that lose trade with EMOTION. If the reason is that simple, why is it that the 76 lose and quit. Because, they fail to adjust and trade without emotion. Most traders learn forex, practice only for a week or two, load their account and go live, and as expected, with the little experience on their side, they crash and burn. Then quitting seems to be the next best option. No brother!Don't!!Let's solve your problem!!!
From personal experience and encounter with some traders, I have discovered two major reasons why they lose:
1. Not following a trading Strategy:
Most traders do not have a trading strategy to follow and as a result, they gamble the forex, entering when they notice a movement in any direction. For instance, when they see a currency pair going up, they immediately buy;and when they see it moving down they immediately sell, without knowing the underlying causes of such sporadic movements. This is purely emotion at work, hence these group of traders are called Emotional Traders. They end up joining spontaneously at the end of these sporadic movements, thereby sustaining losses each time and saying things like:”Forex is a Game of Luck. “No. That is what they are playing-Game of Luck.
Some others watch the market with too many trading strategies, jumping from one to another after a trade that did not favor them. What do they get?A losing Streak, since they may jump into a strategy when it gives a false signal, and jump out when a good one is generated. As we all know, their is no single trading strategy that is up to 90% right not to talk of 100%. You disagree?I think you should do a search on Google. com for one of such. The reason is that the forces that drive the market are countless and since no single person can harness all these forces in placing their trade, we can only tell where the currencies would go on the long run. This is why the Big Dogs are the only almost 100% Right traders in the forex. They Harness as much of the driving forces as they could and place a long term trade with their analysis. These set of run-around traders, when they have enough frustration from their losing streak would generally think it's high time they quit.
2. Not Using Money Management:
Even the richest Central Bank in the world cannot dictate for so long how and where the forex market would or should go by using all the money at their disposal to trade, given the fact that the forex turns out about $2trillion daily. If this is true, how much do you have in your account that makes you think you would be right all the time, or even at any point in time, thereby using large lot sizes to place your trades?An instance would be a trader who has $1500 in his account. Because he wants to trade large lots to make fast gains and double account within the shortest possible time, he chooses a very large leverage, say 1:500(This is what I call Leverage Abuse, because that is not to say that Large leverages are bad. In fact, it's the best)and ends up placing 1 standard lot. For such a person, the odd needs to be against him only for 150pips to wipe out his balance or 120pips to get a margin call with a remaining balance of less than $300.
Money Management is Key. I tell my forex students, “You cannot run from using Money Management. “
You think I am lying?Let's face it. If instead of trading 5micro lots using money management, you start trading with 1 standard lot, then, soon after just a little loss, you would have lost a large chunk of your money and what next, you won't be able to trade those large lots, in fact it would even be difficult to trade 1 mini lot. And at that time, whether you like it or not, you would have to trade 5 micro lots. Nobody guarantees where the forex goes at any point in time, hence many experts would include disclaimers in their trading signals. So always risk as little as possible. I would always advice 3% Money management to beginners. That way, you need more than 33 straight losses to lose all your $1000. And with my trading strategy, I have not encountered as much as 4 straight losses, not to talk of 33 or more. , nevertheless, I still maintain 3% money management. With such a small money management, over some few weeks(16 weeks to be precise), you could turn $1000 into $22000. So how do I use money management to tell How Many lots I should be using in a trade?
Assuming you are going to be using 3% just like I do on an account of $1000, then, Calculate 3% of your account balance. 3/100 x 1000 equals $30. That's how much you can afford to lose should the trade go against you. Not more than that, though could be less depending on your expertise or trading strategy. Using the risk you just calculated, Determine how much you would be making per pip. Just divide the risk by the number of pips of stop Loss you would be using. $30/70pips equals $0. 42/pip. And as you may have known before now, 1 micro lot equals $0. 10/pip, 1 mini lot equals $1/pip and 1 standard lot equals $10/pip. From these, you would deduce that $0. 42 would be about 4 micro lots.
That's that about that for now. For further inquiries, I could be contacted.