Why Do So Many Forex Traders Lose Money?

Forex can be incredibly profitable. I know people who have been able to turn $500 into $500,000 in just a matter of months through Forex trading. 

But the tragic part is that the reverse is also true. You could open a $500 trade, and before you know it – all the thousands of dollars in your account are gone. Poof.

In fact, according to various estimates, anywhere between 70% to 90% of Forex traders lose money on their investments. The primary reason for this is improper risk management. The trading setup and strategy has got nothing to do with it. 

Let me explain this in greater detail through the rest of this article.

As you may know, Forex trading involves leverage. That is, you borrow money from a third-party to amplify your trades. 

If you invest $500 in buying EURUSD and the price goes up by 1%, you only make $5 from this. 

However, with a 500x leverage, when you invest $500, you are effectively purchasing EURUSD worth $250000. So, a 1% increase in price would mean a profit of $2500!

In other words, a 1% drop in price would mean a loss of $2500 – that’s even though you only invested $500. 

When you are a new trader, you lose more than you win. Which means, the chances of you blowing up all the money in your account is going to happen much before you can make thousands of dollars in profits.

What is the real reason Forex traders lose money?

Unlike what a lot of trading newbies think, it’s not the trading strategies and setups that make you money. The real reason why Forex traders make or lose money is because of their risk management.

Think of it like driving a car. Ask a kid how you drive a car, and he will swoosh his arms around over an imaginary steering wheel. The kid thinks moving the steering wheel around is what makes the car run.

But anyone who has driven a car knows that the real trick is beneath your legs – the accelerator, brakes and clutch (if you drive stick) are the real elements that help you go faster or slower. 

Trading setups are like the steering wheel. The real A-B-C of profitable trading is risk management.

At the outset, risk management seems pretty straightforward. You can either keep it close to the open price or keep it far away. 

When you keep the stop loss up close, then you are going to see a lot of failed trades. They all chip in with minor losses. But that can alone eat into your profits making the entire exercise futile.

When you have large stop losses, then you are going to see pretty high win rates. Even as high as 90%. But just a handful of failed trades could make more losses than the cumulative gains made from the profitable trades.

This is the challenge that most Forex traders face and is the reason why they lose money. They don’t know how to cut losses while maximizing profits.

How do professional Forex traders avoid losses

Here’s some hot take – even the most profitable Forex traders have no idea what direction the price is supposed to go. You can look at the charts, follow all the news and think the price of EURUSD can only increase. 

But guess what – they may go down instead. 

Markets are completely irrational. They make no sense.

The most profitable Forex traders are not finance geniuses. Instead, they play the probability game so well. 

This is how you avoid losses in Forex trading and build a profitable business. 

Step 1: Come up with a solid trading setup and strategy.

This could be based on anything. Maybe you like indicators like Fibonacci retracements or MACD crossover. It doesn’t matter what strategy you pick. Understand what they mean, and learn how to trade with them.  

Step 2: Execute hundreds of trades with this setup

Now that you have a system in place, start trading. Make sure you follow the setup rules to the T. You are not looking to make money at this point. You just follow the rules and trade. You could work with any stop loss or take profit setup at this point. You are going to be losing money in the end, most probably.

Step 3: Build different risk management scenarios

Once you have traded hundreds of times, you have to now go back and analyze these trades. Each one of them – both the wins and the losses. 

But before you do that, come up with different risk management scenarios. It could be something like 

And so on..The more scenarios you have, the better it is. 

Step 4: Analyze each trade with these alternate risk management scenarios

Go back to each trade and run these different scenarios. What happens if you took stop loss at 5 pips and profit at 10 pips. Would you have lost money, or made money? Enter these details in your spreadsheet. 

Do this for each trade across these different risk scenarios. 

In the end, run the numbers. Would you have been profitable had you followed any of the risk management scenarios? If yes, you have your answer. You can start trading with these new SL/TP scenarios moving on. 

If not, you have two options – either run more risk management scenarios, or pick a new strategy. 

Do this over and over again till you find something that works for you. It can take several months to do it. But it’s a fun exercise until then. 

How to make Forex trading profitable sooner?

As you can see, finding the right Forex trading strategy can be incredibly time consuming, and sometimes not practical. You can lose trading setups if you take a loo break for five minutes. Which means hours of waiting again. 

If your objective is to make money with Forex trading, but not go through the ordeal yourself, you could explore our copy trading service. 

At Rafrador.com, we do all the hard work of identifying trading strategies, analyzing the various risk management scenarios so that all our investments are profitable at the end of the day. 

You can enjoy the fruits of our labor by copying our trade with an automated system. This way, when we open a trade on our broker account, you open one on your broker too – automatically. 

At the end of the month, you share a small percent of your profit as commission to us in return for the service. 

Sounds interesting? Email us at [email protected] to take it forward. 

PS: Check out the disclaimers at the footer of this page. This is not financial advice. Your money is your responsibility.