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Judah

Reasons Why Forex Traders Lose Money

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In my opinion it's the first of these that leads to their downfall, their backtesting is not realistic, they look at the start and end of the trade without looking at what happens in the middle. Their sample data is too small and they focus solely on trying to make their system work rather than trying to break it.

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All traders, forex or otherwise, lose because they take big losses and take small gains.

 

Whether they back test with a small sample or spend their time making their system work or whether they back test or have a system at all is completely irrelevant.

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In my opinion it's the first of these that leads to their downfall, their backtesting is not realistic, they look at the start and end of the trade without looking at what happens in the middle. Their sample data is too small and they focus solely on trying to make their system work rather than trying to break it.

 

There are some people who say that you need to suffer a few blowouts (wiping out your trading account) before you can become successful.

 

I do not buy into this at all, simply because what this doesn't teach you is discipline, and if you want to become a successful Forex trader, then discipline is one of the key attributes you will need.

 

When starting out you should not just throw some money into a trading account and say to yourself, "Well it is the money i can afford to lose, so what the hell, lets go for it".

Instead you should protect that money as if it is your life saving and losing it all and being blown out is simple not an option.

 

This will teach you to be disciplined both in your mind and in your trading where you should therefore be placing stop losses with every single trade to protect your capital in case you do incur any losses.

The key to becoming a successful profitable trader is to keep your losses small and contained and let your winners run, so your trading pot grows over time.

Unfortunately this is a lesson that even seemingly successful traders fail to learn.they may have built up large profits over a number of years, but if they do not use stop losses then eventually they can potentially be wiped out.

Indeed I know several traders who have sadly suffered this fate (mainly due to their ego and overconfidence) so please do not let this happen to you. Accepting a small loss when your stop loss is triggered is easy to swallow, but suffering a blow out and being completely wiped out due to not having controlled stop losses in place is not.

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...The key to becoming a successful profitable trader is to keep your losses small and contained and let your winners run, so your trading pot grows over time....
this is due the fact that they do not have a plan. there has to be a valid logic behind the every position you(we) open...

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most of the points made are relevant to any market, not just fx.

 

the difficulty with fx is that there is:

1. no centralised order book, but an array of execution venues

2. the same counter party on every trade - i.e. your broker

3. little regulation

 

this all amounts to larger spreads and of course a quote which will be determined by your position if trading against a broker.

 

this implies that the best way to trade fx isn't really to day trade, but to take overnight positions.

 

this is because you will need larger moves to cover higher transaction costs. transaction costs are usually the no 1 killer of any retail trader over time. People will say 'but a 2-3 pip spread on a 20 pip move is manageable' because not every trade makes 20 pips. even if you did, its still 10%-15% of the gain, or 20%-40% if your win rate is 50%

 

the best way for a retail trader to trade fx markets is undoubtably through the futures market on the cme. if you cant afford to do that, then you shouldnt seriously expect to be a success as the odds are simply stacked too high against you. you're better off at the roulette wheel.

 

retail fx is undoubtably the easiest and quickest way to take money of gullible gamblers. the only better way is spread betting in the uk.

Edited by TheDude

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All traders, forex or otherwise, lose because they take big losses and take small gains.

 

So true ... This just happened to me recently selling naked puts ... Gathering small premiums but took a big loss when i was assigned something that dropped big. Argh

 

MMS

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most of the points made are relevant to any market, not just fx.

 

the difficulty with fx is that there is:

1. no centralised order book, but an array of execution venues

2. the same counter party on every trade - i.e. your broker

3. little regulation

 

this all amounts to larger spreads and of course a quote which will be determined by your position if trading against a broker.

 

...

 

 

 

Yes, although brokers hedge their position mostly, hence, being only the middlemen.

 

The above means also that no fully reliable volume info is available. Hence, a valuable source of trading info is missing as compared to other instruments (I know, some methodologies do not require volume information).

 

What I would add as a negative also, is the fact that fx is more a "conceptual idea" of prices. You just trade a relation between two currencies. This is different to stocks or index futures (even a currency index, like the dollar index), for instance, as these reflect a value of one asset (or in case of an index a defined basket of assets) and not a relation between two assets. I have to admit that I haven't done any analysis on this but it could be possible that technical patterns are not as clear with relations between two assets as with the price of one asset, as relations behave differently (e.g. it seems very unlikely that a relation between two currencies approaches zero... however, it's not as unlikely with stock values).

 

However, I had my difficulties with fx and stopped my endeavors in that area. Instead, I've focused on index futures as the concept appealed to me much more, due to the above. But this might also be just a personal preference. I've read also about one guy, who was supposed to be successful in fx trading, and he stated that he actually preferred this conceptual idea of fx.

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most of the points made are relevant to any market, not just fx.

 

the difficulty with fx is that there is:

1. no centralised order book, but an array of execution venues

2. the same counter party on every trade - i.e. your broker

3. little regulation

 

this all amounts to larger spreads and of course a quote which will be determined by your position if trading against a broker.

 

this implies that the best way to trade fx isn't really to day trade, but to take overnight positions.

 

this is because you will need larger moves to cover higher transaction costs. transaction costs are usually the no 1 killer of any retail trader over time. People will say 'but a 2-3 pip spread on a 20 pip move is manageable' because not every trade makes 20 pips. even if you did, its still 10%-15% of the gain, or 20%-40% if your win rate is 50%

 

the best way for a retail trader to trade fx markets is undoubtably through the futures market on the cme. if you cant afford to do that, then you shouldnt seriously expect to be a success as the odds are simply stacked too high against you. you're better off at the roulette wheel.

 

retail fx is undoubtably the easiest and quickest way to take money of gullible gamblers. the only better way is spread betting in the uk.

 

Very well said. No trader has any excuse for not knowing that the Forex is more corrupt and manipulated than any other trading vehicle you can think of... so it's hard to feel sorry for ignorance of that magnitude. It will never be regulated until Forex traders start demanding it.

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Hey Roger, what's up my fellow playa! I got no response from you in the other thread. Guess that means no go on me observing your mad skillz for a week?

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Hey Roger, what's up my fellow playa! I got no response from you in the other thread. Guess that means no go on me observing your mad skillz for a week?

 

Sorry for not responding but, as I said in that thread, I just had enough and would not return to respond to any additional posts there. Huge waste of time. I do read my PM's, though.

 

Anyone who wishes can freely observe my trade entries and management and hear all of my commentary on a daily basis. If you are speaking of my offer to work intensely with a few traders for one week, I'm actually doing that with 5 traders and very pleased with their progress. Five was more than I had planned but they are quick learners. Their training will end on Friday.

 

It wasn't hard to find a forum where most members were willing to give me a chance. Most were skeptical but there was no animosity or groundless hatred on their part. I trust their feedback on that forum to be fair and totally honest. As you know, traders in that TL thread would never report the truth if it meant saying anything good about me... and that would, of course, defeat the purpose of my offer.

 

It's amazing how some people can have such a strong dislike for someone they don't know, have never seen, ever watched trade, doesn't want payment and just wants to help. I find that sad yet humorous at the same time.

 

Thanks for asking!

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...It wasn't hard to find a forum where most members were willing to give me a chance. Most were skeptical but there was no animosity or groundless hatred on their part. I trust their feedback on that forum to be fair and totally honest. As you know, traders in that TL thread would never report the truth if it meant saying anything good about me... and that would, of course, defeat the purpose of my offer...

 

What or who is stopping you here?

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Getting back to the thread topic here....

 

I think the reasons why most Forex traders lose money are the reasons they would lose money in any other market type. To consistently stay ahead of the game, traders must address the "5 M's". They are Method, Mechanics, Mindset, Management and the Market itself.

 

If your Methodology is flawed, then you can't win until you get it fixed. Sometimes a simple tweak is needed and sometimes you need to ditch the whole enchalada.

 

You might have a great Method, but your execution Mechanics suck. Mechanical errors in execution and Management can be devastating. Practice the mechanical side of trading until everything is so automatic you hardly think about it.

 

I can spot a losing trader in a heartbeat. It shows in their Mindset. A negative defeatest state of mind becomes a vicious cycle of damaged confidence and human emotions thrown into the woodchipper. Trader attitude gets sucked into a vortex...a black hole of despair from which escape becomes nearly impossible without help.

 

Trade Management should need no explanation. Management mastery is more important than the ability to find great entries.

 

Ah, the Market. This is where traders handicap themselves from the get go. They choose to trade stocks short term. Bad idea. They try to learn options. Great idea if you have 10 years or so to spare. Or they try trading the Forex. Here's a better idea...go to Vegas and put your money on the Pass Line. You won't there either but you'll get free drinks.

 

Do yourself a favor and trade markets that give you a level playing field. Choose the ones that offer the highest profit potential with the least amount of risk in the shortest period of time. That will never happen in Equities, Options or the Forex but, trust me, they do exist.

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Thanks to share reason of losing money in forex trading. However these are not complete list of reasons.

 

Definitely this is the main reasons. I am sure you will agree with me-

-Trading because of the buzz it gives

-Over-leveraging and putting too much risk on the table

-Closing out a winning position too early

-Trading with a small account

-Feeling you always have to be in a trade / over trading

:rofl:

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What I would add as a negative also, is the fact that fx is more a "conceptual idea" of prices. You just trade a relation between two currencies. This is different to stocks or index futures (even a currency index, like the dollar index), for instance, as these reflect a value of one asset (or in case of an index a defined basket of assets) and not a relation between two assets. I have to admit that I haven't done any analysis on this but it could be possible that technical patterns are not as clear with relations between two assets as with the price of one asset, as relations behave differently (e.g. it seems very unlikely that a relation between two currencies approaches zero... however, it's not as unlikely with stock values).

 

Completely understandable that its hard to grasp the concept in FX sometimes.

(Just as some people cannot grasp the idea of shorting - how do you sell something you dont own? :))

 

Karoshiman - to help you get over the FX issue as a suggestion - think about it this way.

 

When ever you trade you are always trading the relationship between two assets.

When you buy/sell a stock index you are actually saying that you think there is better value in the trade of the index than just sitting in cash.

 

Think about it in those terms - its all a substitution, as no one is making you trade.:2c:

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Completely understandable that its hard to grasp the concept in FX sometimes.

(Just as some people cannot grasp the idea of shorting - how do you sell something you dont own? :))

 

Karoshiman - to help you get over the FX issue as a suggestion - think about it this way.

 

When ever you trade you are always trading the relationship between two assets.

When you buy/sell a stock index you are actually saying that you think there is better value in the trade of the index than just sitting in cash.

 

Think about it in those terms - its all a substitution, as no one is making you trade.:2c:

 

 

Hm... good example... made me think...

 

If I buy or sell an index or a stock I am assessing/forecasting the value of it. Yes, I inherently I compare it with my cash. But my analysis is based on the past behavior of the price of the asset and not the relation of the price of the asset to my cash position. I'm just saying that it's possible that prices of assets behave differently than their relationship to prices of other assets. My mathematical example fuels my doubts (that it's more unlikely that fx pair relations approach zero). Plus, I've once heard from a forex trader that he liked to apply his technical analysis to the dollar index, as it provides a "clearer picture" as compared to an analysis of an fx pair relation alone. This is also a hint that relations might behave differently than prices. But the differences might be minor only.

 

Anyway, I just wanted to provide a different point of view to the discussion :)

 

And... if a trader trades fx successfully... don't fix something that isn't broke...

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I get where you are coming from as per discussion, yep - comparing it to a basket may make sense, the question will then become one of putting on the trade that best represents the idea.

eg - you are bullish the USD basket. do you buy the USD against many currencies or the weakest relative to the USD

I also think that in this case it is more a point of mindset.

If you are a EUR denominated trader and you are bearish EUR to the USD should it make any difference if you are a GBP or AUD denominated trader with the same view?

The only basic difference will be in how your PL is reflected.....but it should not change the trade view. I think you are right "that prices of assets behave differently than their relationship to prices of other assets", and thats what you are trading.

Another example is that of spreads eg; long duration bonds v short duration and the spreads there (I dont really trade these but it makes sense that they can often be used to trade an idea better than other things)

 

Maybe it really is just as you say - the reason why some people loose is that they dont view it as a realative trade,

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To be successful in trading, it is important to have a good plan and strategy method. I would say that many forex traders lose money because

 

Naivety

Lack of common sense

They're out of their depth

They don't know what they are doing

They're crushed psychologically

They don't have a method

They aren't treating trading like a proper, genuine business.:helloooo:

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3 reasons, and only 3 reasons:

 

1. They don't have an edge

 

2. They don't have a plan that provides clear structure on how to best apply that edge, and

how to best avoid the risks associated with trading.

 

3. they don't follow their plan (good ole' patience and discipline are attributes needed to follow ones plan)

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. transaction costs are usually the no 1 killer of any retail trader over time. People will say 'but a 2-3 pip spread on a 20 pip move is manageable' because not every trade makes 20 pips. even if you did, its still 10%-15% of the gain, or 20%-40% if your win rate is 50%

 

the best way for a retail trader to trade fx markets is undoubtably through the futures market on the cme. if you cant afford to do that, then you shouldnt seriously expect to be a success as the odds are simply stacked too high against you. you're better off at the roulette wheel.

 

retail fx is undoubtably the easiest and quickest way to take money of gullible gamblers. the only better way is spread betting in the uk.

 

TOTALLY AGREE!!! The main reason why I think people trade the FX markets as opposed to the future equivalent is simply because they are underfunded. Basically the forex traders get bled to death.

 

So far I haven't been introduced to any strategy that is better used, implemented, and executed on FX.

Edited by Colonel B

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TOTALLY AGREE!!! The main reason why I think people trade the FX markets as opposed to the future equivalent is simply because they are underfunded. Basically the forex traders get bled to death.

 

So far I haven't been introduced to any strategy that is better used, implemented, and executed on FX.

 

For the most part... I agree. Though I find trading the crosses is more straightforward and in general easier to execute in the spot market, hands down. I will regularly put on decent or even large positions in spot for cross pairs. Also, position management is much more flexible... a person can take off 13.21% of their trade without any difficulty...in futures such a position adjustment would only be possible if you are trading contracts in the double digits. And in the UK, the benefits of speadbetting being tax free is significant...

 

but, in the U.S, if your trading any pair with USD in it... one is almost surely better off trading it in futures. For me, I view my futures trading as very short term, whereas my spot trading I will manage differently..however, if I put on a "big" position in a major currency, I almost always do it in futures, not spot.

 

I don't understand people that "scalp" the eur/usd, or usd/jpy, or gbp/usd, or whatever/usd... but who do it in spot rather than in the futures markets. I do it in both, but youo can be sure that the lionshare of my risk and profit is coming from the futures side of the trade, not the spot side.

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For the most part... I agree. Though I find trading the crosses is more straightforward and in general easier to execute in the spot market, hands down. I will regularly put on decent or even large positions in spot for cross pairs. Also, position management is much more flexible... a person can take off 13.21% of their trade without any difficulty...in futures such a position adjustment would only be possible if you are trading contracts in the double digits. And in the UK, the benefits of speadbetting being tax free is significant...

 

but, in the U.S, if your trading any pair with USD in it... one is almost surely better off trading it in futures. For me, I view my futures trading as very short term, whereas my spot trading I will manage differently..however, if I put on a "big" position in a major currency, I almost always do it in futures, not spot.

 

I don't understand people that "scalp" the eur/usd, or usd/jpy, or gbp/usd, or whatever/usd... but who do it in spot rather than in the futures markets. I do it in both, but youo can be sure that the lionshare of my risk and profit is coming from the futures side of the trade, not the spot side.

 

I am curious. What is the 1:1 conversion for the FX size to future size for which you are mentioning with the 13%? Yea if you are trading minis on the FX and 1 pip = 1 cent per contract then yea you can put on a whole bunch. Its true you cant get smaller then 12.50 per pip/tick on the futures side. But that goes back to what I said about being underfunded. In these situations its better to build up your size and get into something with a bigger tick/pip payout. So I don't think players that are successful stay in those markets for very long. Just increasing size larger and larger.

 

Totally spot on on the US bit. Thats where I live and trade from. If you have a tax advantage trading in the UK then yea that makes sense.

 

Good post

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