Here you will find the top ten reason I think most people fail at forex trading.
The Top 10 Reasons Traders Fail
Every trader’s goal is to set himself apart from the crowd and avoid losing money. Obviously, not every trader can fall in this winning bracket, so to be one of the few who do have to set themselves apart from the crowd with smart a strategy and a different approach. To be one of the minority who consistently succeeds in trading, avoid making the following ten mistakes.
1. Looking for a Holy Grail. Traders who skip around from one method, system, indicator or service to the next in order to find a perfect solution with instant gratification usually end up disappointed. If this describes you, stop right where you are.
2. Not sticking to a plan. A methodology, or trading system, is essential. The markets can be chaotic and confusing, especially for someone without a specific plan of action that can be used again and again. Without a plan, you will react to the market instead of anticipating the market. Creating a trading plan is a highly individual process and usually stems from years of experience.
3. Improper mindset. Humans are emotional creatures by nature, but being emotional in the uncertain environment of trading can be calamitous. Almost every book on the subject of trading psychology hammers home the idea of more discipline and less emotion. Emotions will inevitably come into play while you are trading. It’s how you deal with those emotions that will define you as a winner or a loser.
4. Improper trade size. Capital preservation is paramount. Poor account sizing— risking too much per trade— is a sure fire way to fail. Trading is not a sprint; it’s more like a marathon, and a very long marathon at that. You will lose trades here and there. It’s how you deal with losing that matters.
5. Poor risk-to-reward ratio. There are two reasons traders end up with a poor risk-to-reward ratio:
a. They don’t have a trading plan and instead simply react to the market.
b. They simply can’t hold their winners… but they hold their losers.
Having a plan gives you the confidence to see your analysis through to the end. I have a 62% win/loss ratio, and my risk/reward ratio is better than 1:2.
6. Holding on to losing trades and getting rid of winning trades. Here we go again: the old “but I don’t like to lose” argument. It’s human nature to hold onto losses in the hopes that they will rebound. You will have losing trades; get used to that fact. Focusing on how you manage loss—rather than trying to ignore it—will put you ahead of the crowd.
On the flip side, traders often get out of winning trades too early so they don’t have to deal with “giving profits back.” If you want to lose money trading, holding losses and getting rid of winning trades is a sure fire way to achieve it. In trading, it’s much more important to be profitable than to be right, and in order to be profitable, you need to cut your losses early and let your winning trades keep working for you.
7. Thinking of trading as black and white. It might pain you to hear this, but trading is not a black and white process; there’s a lot of gray. Another losing analogy is the “red light/ green light” system. Having a simple 3-step process to help you frame and identify a trade set-up is okay, but experienced traders know that nuance is where real insight lives.
Some days, trading is indeed A + B = C. Other days, trading is A + B = 1 (or D or F or Z). If trading was A + B = C all the time, everyone would know exactly how to win. This is not realistic.
8. Overtrading. This one is simple. If you’re trading simply for the sake of trading, you’re overtrading. Trade because you see genuine opportunities in the market. Trading is not like a 9-to-5 job where you are rewarded for constant productivity. You don’t get paid to push buttons all day long; you get paid by making good, winning trades. It’s that simple. Movement in the markets doesn’t mean you must trade. Trade when things line up for you. Be patient, wait for setups to occur, and when they do, take action. If you want to succeed at trading, you need to act like a winning trader, and winning traders are patient and wait for setups.
9. Not taking trading seriously. I’m often puzzled by how often people approach trading with a different attitude than they do any other moneymaking venture. Trading is a business, and like most vocations, it takes time to learn how to perform well. People go to school for years to become doctors; but many so-called hobbyist traders think that simply reading a few “For Dummies” books or scanning some indicators will suffice. This attitude toward trading is like throwing darts at the wall with a blindfold on. Shortcuts and scams don’t work. Trading is not easy, and you can’t learn it without effort. You can, however, enlist a seasoned expert (like us) to guide you.
10. Not having a successful mentor. Any successful trader once had a mentor, coach or service help him to formulate a plan and strategy and learn how to be successful. I am no exception to this rule.