In order to learn how NOT to lose money trading forex, one must understand why so many traders lose money in the first place. Its like troubleshooting a software issue in your laptop. Imagine if there was something wrong in your laptop that needs immediate attention and you just did not know the problem even existed, until the whole system crashed eventually. Similarly most traders just do not know what or where the problem is but manage to find themselves in drawdown consistently. There are in fact simple methods to find out actual reasons as to why so much of your trades are losing.
Its simple because you can narrow it down to a handful of trading mistakes that causes the continuous losses.
Here they are…
Before that let me do a confession. I actually changed my idea about writing the “10 ways to avoid losing money in forex” and provide you with even more useful insight into underlying problems. I have found that there are 3 main problems as reasons for losing consistently.
Once again… Here they are…
1. Eager to trade and make money quick
In short, Greed! This is the number one killer of forex accounts. Overtrading, chasing trades and using uncontrollable amounts of leverage to open incapacitated positions, are all symptoms of this devil – Greed!
If you are a victim of this disease and are having similar symptoms, then you should stop trading immediately. In order to get your thought process right and to make correct decisions, you have to have a positive attitude towards trading. Guess what, slowly but surely greed deteriorates your attitude.
There is only one way you can have a positive attitude in trading. Treat it as a business! Losses are your cost of running the business.
2. Not using the Stoploss and Takeprofit features correctly
This I believe the second most popular method of blowing an account. Stop loss settings are there to help you protect your capital. But if you fail to use them the correct way, it can soon become a threat to your capital. Just like leverage, Stop Loss setting is a double edged sword.
Let me explain. Suppose you have a preset fixed SL and TP settings for each of your trades. Now go back and analyze your history how your trades would have played out, if you had set a larger SL. This is not to say that SL should be set wider compromising the risk to reward ratio. We will come to that later. All I say is that your SL setting should be logical and have enough room for the trade to play out.
This brings the attention towards the timeframes and trade setups. The SL should be rationalized according to the trade context. What I mean by this is to understand the trade setup and the timeframe used to enter the position, then set the SL where the setup would be invalid if price ever hits the SL.
Its naive to enter each and every trade across all timeframes with a tight preset stoploss.
A simple analogy is to observe the candle wick sizes across timeframes. Take any trend on any timeframes and calculate average wick sizes to the opposite direction. You may use any number of candles to average the wick size. It doesn’t matter where you entered the position, even if you traded in the direction of the trend, if your SL was narrower than the average wick size, you have a very high probability of losing the trade. Because its simple logic. If your calculations of the opposite wick size suggests that on average price moves this much in the opposite direction within one candle, why on earth should a SL be placed narrower than that. Its a suicide mission, don’t you think.
Well, this is not my exact strategy to calculate SL levels, because I trade a lot of Harmonic Patterns which incidentally appears on rangebound markets. As they say the price always is in a one huge flat market, I don’t really like the idea of trends. Because its a subjective term. On the other hand I trade waves, in which you can add some contextual thinking and projections for future price behavior. Its a different topic altogether.
3. Fear of Losing Trade Opportunities
How often do you enter a trade which seems to be a high probability trade in the right direction, just to find minutes later it was totally the wrong decision? When I first started trading, often on hindsight I would go through a mental rewinding process to see what went wrong, and I used to come up with pathetic scenarios talking to myself – ‘Only if I had done this or done that…, Only if I had taken the trade to the opposite direction I would have made a profit… etc.’
Well the truth of the matter is that I had entered those trades because of the ‘fear of losing the opportunity.’ I understood this long ago. But it took more time to implement remedies practically.
The solution for this problem is really simple. If you feel for a slight bit that you have missed a great set up by a candle or so, let it be and look for the next opportunity. Sometimes a no-trade day is the best trading day. Its simple maths, remember – zero is always greater than negative numbers.
In conclusion I want to say a word or two about common “problems” faced by traders, as they call it, specifically – discipline and psychology. I partially disagree on the way these subjects are tackled on the web. Simply because you can be the most disciplined trader in the world with the right mindset and you may still be losing consistently if you don’t understand the 3 points I have discussed in this post.