8 Reasons Forex Traders Fail

A statistic we often see when discussing foreign currency, or forex, trading is that 90-95% of traders fail. Is it because the foreign currency market is so difficult or risky that only a gifted few with special secrets can master it? No, there are no secrets. There are definable reasons for trader flunk-outs. Here we'll examine some of those reasons so you can avoid them and put the odds in your favor to succeed.

1. Trading Too Soon
As tempting as it is to install that new algorithmic forex trading software and open an account with your life savings to make it rich by next week, it's a sure-fire way to failure. Take the time to learn! There are so many resources available with articles, websites and forums that there really isn't any excuse to not do your homework. Get a demo account and work with it under real-time market conditions to learn to analyze and place your trades, demo your trading system and make sure it works before putting your money at risk.

2. Using Money You Can't Afford to Lose
Don't believe any hype that says that foreign currency trading is low-risk. It isn't, especially for the beginning trader. Even the most experienced traders lose money sometimes. Any money you invest in the markets must be risk capital or money you can afford to lose without impacting your basic financial security.

3. Over-Leveraging
Leveraging, or borrowing money to supplement your investment, makes it possible for individuals without millions of dollars to trade in foreign currency. Leverage allows for greater potential returns but also increases the potential for loss. If the trade, or investment, goes south, the loan principal and interest still has to be repaid.

4. Not Starting With Enough Capital
If your initial investment is too small, your profits can be devoured by fees that are proportionally higher than they are for larger accounts. Without adequate capital, you are restricted in the number of positions you can have at one time and unable to make good trades as they come along. It also prevents you from being able to diversity as you should to maximize profits and minimize risks.

5. Trading Too Big
You can lose lots of money fast if your trade is too big. Thinking you can risk 10-20% of your investment on a single trade in the hopes that if just a few are profitable you can double your money is a good route to failure. Your trading size should be based on your account size and the risk being taken. If a loss puts your long-term ability to keep trading at risk, the position is too big. Generally, experienced traders risk no more than 1% of their capital per trade.

6. Not Having a System
To be a successful trader you must have a system and the discipline to follow it. While there are probably as many systems as there are traders, you must have a plan and stick with it, taking emotions out of the equation.. It will include exact criteria to be met when entering and exiting a trade and be clearly definable.

7. Trading Emotionally
Trading can be very exciting and a big win, like in gambling, will make you want to do it again. It's tempting to jump right back in with a new trade, possibly without the space and perspective to make a good decision based on your system rather than the high of the win. Likewise, a loss can have a similar effect on your perspective resulting in an emotional trade, not a sound system based trade.

8. Thinking You Know it All
The educational process of forex trading never stops. Every single trade is a lesson and to start to believe that you have it all mastered and know everything there is to know is a good way to get a hard slap from the markets.

New traders will make mistakes. It's part of the learning curve and educational process and can valuable in the long term if you learn from them. Take the advice here so you can avoid some of the bigger mistakes too many make . It could save your money in avoidable losses, and potentially lead to more profits.