The statistic that 95% of retail Forex traders lose money is often thrown around on the Internet and while I do not have access to a broker’s actual stats in order to confirm this I see no reason to doubt these figures. Whatever the actual failure rate in retail Forex is, it is certainly the vast majority who fail and in this short article I am going to look at the reasons for why this is and what traders can do to improve their chances of success.
The problem that retail Forex traders face is that in order to succeed at currency trading one must generally do exactly the opposite of what comes naturally. Successful Forex trading strategies go against most people’s instincts and emotions. Successful Forex trading strategies are perhaps best summed up by the old saying “cut your losses quickly and let your profits run” – sound advice but something most traders will find very difficult to actually do in practice.
You see, the human brain is wired to attempt to maximize the frequency with which one wins rather than maximize the amount one wins on a winning trade. This is because humans do not ‘feel’ the effects of a win and a loss of equal size in equal measure. A loss of $100 for example will not be offset by a win of $100 emotionally even though the monetary amounts are equal on a balance sheet. And it is this that gives rise to the feeling even after a trader has accepted that losses are a part of the game and have to be accepted sometimes that this particular trade that they have open right now just somehow needs to be one of the winners.
The inability to take a loss as easily as it is to close a winning trade and take the profit leads traders to cut their winning trades to soon and leave losing trades open to get out of control and this, I believe, is the single biggest reason for why most traders lose. To succeed at trading takes a lot of mental strength and self-control.
One of the easiest ways for traders to avoid letting their emotions getting out of control and leading them to make bad trading decisions is to follow a mechanical trading system that doesn’t involve them sitting watching the market all day. For most traders, sitting staring at a price chart watching each tick in a volatile market generally wears them down mentally until they go against their system and make a mistake. The easiest systems for traders are therefore usually systems that allow them to place a trade and then forget about it.