High risk, high reward: Top 10 reasons why traders lose money
The world of trading can be incredibly profitable or a disaster depending on the trade. We list ways you can reduce risk and overcome the loss.
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” — George Soros.
The financial markets present a world of opportunity for traders. Sadly, for every win, some lose out.
In this article, we’ll highlight ways in which stock and forex traders lose money and how you can manage risk.
1 Trading isn’t gambling
It’s important to understand that trading, whether it’s forex, stocks, or commodities, isn’t gambling; it’s the trader that’s gambling, not the markets. Trading is a skill that can be learnt over time, gambling is a game of chance. There is no comparison.
Professional traders don’t get every trade correct. The difference between a veteran trader and an amateur is their win-loss ratio; the professional makes more money on their wins compared to their losses, which results in a healthy return on their investment.
2 Being reckless
Being reckless, having unrealistic expectations and unwilling to increase your skills is a recipe for disaster. Traders increase their risk when they begin focusing on their take-profit and stop-loss levels. This usually occurs during periods of loss. Some tend to extend the stop-loss level in the hope that a diminishing trade will eventually reverse and turn profitable. The trouble is, losing trades, left to run their course, will eventually wipe out your account. It’s better to acknowledge the loss and exit when it reaches your stop-loss levels.
3 Risking too much, too quickly
Many new Forex traders hope that the markets will lead to quick profits and use all their initial capital. This is very risky and a quick way to lose your capital.
A rule of thumb for any investor is – slow and steady wins the trading race. With a calculated approach, you will maximize your capital and minimize your risk.
Beginner traders should risk no more than 1% of their capital per trade. Trading any more than that increases your chances of making a substantial loss.
As you increase in experience, you can raise your investment amount. Overall, you never want to trade with a substantial amount of your capital in one trade.
4 Poor Risk Management
Having poor risk management, or worse, no risk management, is one of the major reasons why traders lose money.
Trading is about calculated risk and risk management is key to surviving the financial markets. Regardless of your skill level, you can still suffer huge losses through poor risk management.
You need a trading plan to maximize your profit. Implementing automatic take-profit and stop-loss mechanisms will drastically improve your chances of success.
A successful trader needs to know to implement stop-losses and take-profit mechanisms and tailor them to each market’s conditions at the time of trading.
5 Over-trading can rack up charges
The best traders do not make many trades in the day but are decisive in the few they make. Over-trading is a common way traders limit their profit potential.
Traders who are indecisive in their trading will quickly rack up losses and incur fees via spreads. A good trader does not need to make a lot of trades to be successful, you just need to choose the correct ones.
Having a trading strategy is crucial as it allows you to recognize the correct conditions to make a trade.
6 No trade management system
Making a trade is the easy part, watching it is when the difficulty and stress begins.
Many amateur traders have no trade management plan. This leads to a false belief that they can simply react correctly to markets even when the pressure mounts.
A good trade management plan includes when to open/close a trade, your minimum risk/reward ratio, and the percentage of your account you’re willing to risk.
7 Improve your skill, master your trading strategy
It’s not enough to just pick a trading strategy and hope for the best. Putting in the time to learn and master it is crucial to becoming a great trader.
A trading strategy is only as good as the trader implementing it. Taking the time to learn and understand it is the difference between major profits and losses.
Even veteran traders make losses on the market, but a successful trader consistently makes money and has a higher win/loss ratio.
Whether you’re trading Forex or buying indices, your success is measured by your consistency.
8 Unrealistic Expectations
Trading is not a get rich quick scheme. We’ve all heard stories of investors making millions by trading and while this is certainly possible it still requires patience and consistency.
You should not enter trading with the hopes of making a lot of money in a few major trades. This leads to bigger losses over time.
Trade smart, not harder; Smaller trades, if possible, every day, made over time, is a safer bet than putting all your capital on one major investment.
9 Losses can and will happen
Even if you have a good trading strategy, even if you put in the time to upskill yourself, losses will occur. Your ability to accept your losses and move on will determine your future as a trader.
Markets can change swiftly whether through rumours, political meddling, or acts of nature. Sometimes losses will be out of your control.
10 No long-term vision
Trading is a marathon, not a sprint. Your performance over the long term is more important than a single difficult day on the markets.
Minimize your market exposure per trade and you’ll have the remaining capital to shake off a potential loss and start trading again.
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