Forex psychology part I: Why traders loose?

One of the statistics most commonly thrown about on the Internet regarding the success (or lack of it) of retail Forex traders is that 95% of retail Forex traders lose all or most of the money in their trading accounts in a short period of time. Whilst I do not have enough data from various Forex brokers to confirm these statistics myself I see no reason to seriously doubt their accuracy. I personally would be very surprised if anymore than 10% of small retail FX traders are profitable for any length of time and I’d actually be even more surprised if more than 1% of retail traders did very well out of Forex trading. To be sure there will be some traders who do exceedingly well out of retail Forex trading and make a lot of money, but those traders must be a very small minority.

Trading psychology; the main reason for failure,

I believe the main reason for the appalling failure rate in retail Forex is to do with psychology and the mental state that retail traders soon find themselves in once they first start trading. I believe that most retail traders are driven by their emotions to do exactly the wrong things. You see, in Forex trading, what feels like the right thing to do is usually the wrong thing to do, while doing the right thing just somehow feels wrong to most people’s minds. As people who have read my previous articles on the Forex trader’s edge and Forex trading strategies that work will already know, the edge in Forex comes from the trend and a trend needs time to work. The best trading strategies for the Forex market are therefore medium to long-term trend following strategies, these strategies demand that the traders cut off losing trades fairly quickly and leave winning trades on to grow and grow.

I believe the main reason for the appalling failure rate in retail Forex is to do with psychology and the mental state

But as I said, long-term trend following just feels ‘wrong’ to most people’s psyches as a medium to long-term trend following strategy demands that we cut off losing trades before they get out of control while we leave winning trades on to grow and grow. While this sounds very logical, and easy to do in theory, in practice most people will find this a very difficult thing to do indeed, especially when it is their own money that is at risk. Most people will find that whatever their trading plan says, when it comes to actually putting this plan into practice they will want to grab a small profit when it first appears rather than risk losing it. And likewise traders will generally experience the urge to leave a losing trade on in the hope that it turns around rather than want to close it down and crystallise their loss. Trend following strategies aim to maximise the size of the winning trades, but human beings generally feel the urge to maximise the frequency with which they win. This is because while traders (intellectually at least) accept that loses are a part of trading and to be expected, at any given time most retail traders will still experience a strong feeling that this particular trade that they are in right now needs to be one of the winners.

The Forex information website Daily FX for example recently published a study on why most retail traders fail, the study seems to confirm my thinking on this. The study shows that Forex traders are correct more than 50% of the time but the average size of their winning trades is much smaller than the average size of their losing ones. Another reason for failure can be wrong forex broker, there I highly suggest that anyone willing to trade, will choose only the best online forex broker that is both serious and have rock solid reputation.

Remember, when you’re trading, you’ve got to be mentally tough. It takes a lot of discipline and self control to stick to ones plan.