Today I’m going to talk about the top 3 reasons why I see so many people lose money with trading. This actually can be used for anything in life, relationships, business, sports, investing, the keys to success are generally the same. I’ve narrowed it down to 3 and these are the reasons MOST people lose money in the markets. Remember only 5% of traders are profitable. That means 95% of people lose their money. DON’T THINK like the 95%.
Table of Contents
1.) Discipline: Mindset & Psychology.
I call it discipline for the most part but others call it trading psychology or the mindset of trading. We have done posts on this in depth but the general point is people who start trading forex honestly aren’t committed in their mind. They don’t see themselves becoming a full time trader and hence don’t go 100% all in. Let’s take an example. John deposits £2,000 into a forex account and wants to make £500 a month from this. He uses 50:1 leverage and goes and buys a course on how to trade profitably.
Now what are the issues here – 1.) He’s trying to make 25% a month (which is fine) but this is his first month! 2.) He has no trading experience 3.) He’s getting information from anyone. 4.) Will he use this information wisely and have the patience? — Bye bye money.
Now a more likely example is someone who has been trading in a demo account for a few months, has been learning from good authority sites, reading all they can on how to trade and essentially picking up information as they go. Should they start trading? NO. The reason – They do not have a back-tested strategy. That’s it.
Once you have your strategy in place the key is to stay disciplined. You might be aiming for 10% account growth a month. But some months you might only hit 2-5% or even make a loss. Is that a problem? Not at all.
The next most common trading mistake I see is just simply a lack of knowledge about the markets. If you haven’t been actively training yourself for a year or more then there is a very small chance you are going to be profitable and an even smaller chance that you will remain profitable over the long term.
I always talk about building strategies that can be back-tested. But it’s difficult for 2 reasons. The 1st is IT TAKES EFFORT. and the second is that if you actually have a strategy it needs to be written like a formula. Let’s take even the simplest strategy (simple is best remember) and think about a double top @ structure/resistance, turning around into a retracement.
- Market has to be trending in an upward direction – Key: How long, how many candles, what timeframe?
- Until market reaches a point of resistance – Key: A minor point? A major point? What happens if it blows straight through it?
- When reaches resistance, must make a double top – Key: On what timeframe? How long can we leave it? Do we enter a short as soon as it touches or when candle closes?
- Take profits at the XYZ Level – Key: Take profits and stop losses where? And WHY ARE THEY THERE?
These are questions you should ask yourself before you even start trading or make a trade in the morning. But try not to make it an emotional decision. For example: I can see the market is trending upwards and has hit a resistance level. There has been a double top but it has closed ABOVE the resistance level. Should I just take it anyway?
Can you see how this is a very difficult question and EMOTION plays a huge role. If you enter the trade and it goes short then you are GREAT! If you enter and it goes up are you “unlucky” or “undisciplined”.
When you build your strategies make sure you know what to do in very specific situations so that nothing is an emotional decision.
Oh and every successful trader or business person says, never stop learning.
3.) They don’t treat it like a business
This is one that I haven’t seen anyone else in the industry talk about but it’s incredibly true. Luckily I came from a business background so setting it up like a business was pretty easy, but if you don’t come from a business background you need to manually change your thinking from “I’ll just try to make xyz amount of money/pips per month” to “How am I going to scale my business?”
This encompasses things like – How many trades to make each month, what specifically you should be looking for in the market etc etc. So if you have a trade capacity of 50 trades per month, you won’t waste those on set-ups that only have a 50% probability of going in your favour. Remember trading is all about probability vs reward.
“What am I going to invest” – How much are you going to invest into a.) Your trading account itself b.) The training of yourself? And c.) How much time am I willing to invest?
These are all questions you need to ask yourself before starting a business and you should ask them before starting your forex journey too.
Whenever you have the “itch” to trade remember these 3 rules before pulling the trigger. The more trades you make the more chance you have of “losing to the spread” – Over-trading almost made the list as one of the most common forex trading mistakes but didn’t quite sneak in. I hope you enjoyed and remember to comment/share, Thanks! Tom.