Why Forex Traders Loose Money and How to Avoid It
When they start Forex Trading, 90% of the traders tell themselves they are not going to lose 10 times in a row; they're going to be smart, going to be safe and going to be sure; they're not going to get carried away and they're going to remain objective and rational through trading; they're going to stick to their trading plan like glue. Then they start trading and forget these things.
Everyone loses money sometime or the other while trading – it's unavoidable. But most people don't just lose, they lose hook, line and sinker. And it's not because they didn't do their homework, read the charts or didn't plan well – it's a reason as trite as ever – they didn't manage their money well.
While you can't eliminate loses in Forex/Currency Trading, you can definitely minimise them by managing money properly. Many traders will tell you Forex Trading is as good as gambling. But this doesn't mean you have to be a gambler – a smart trader knows that the only person winning in a gamble is the casino. And that's exactly what you want to be – The House.
The trick to not losing your money and your sanity at the Forex Market is not so much in your trading plan, but in your risk taking approach. One of the first mistakes you can avoid is taking too much leverage. When you take a 250:1 leverage, you are increasing your chances of profit AND loss 250 times. Stick to a 100:1 leverage in a mini account with $10,000 or a 50:1 leverage in a micro account with $1000.
The second thing to consider is how much you're willing to risk on each trade. Assuming you did not just inherit millions worth of estate, the safest option is to risk no more than 2% of your capital on each trade. This is to safeguard you on those bad trade days when you're stuck with a losing streak. A small risk percentage will ensure that even after losing 10s trades in a row, you have a sizeable amount of capital left.
A third thing that you can do is spot those trades where profits are higher than losses. If you come across a trade where you have the potential to make three times what you might lose, take it. If you come across 10 such trades, take all of them. Even if you lose five of them, to 3:1 reward to risk ratio will ensure that your profits are higher than your losses.