Featured | Jun 17, 2010 | 0 Comments

Three Reasons Why You’ll Fail in the Forex Market—Conquer These to Succeed

While there can be a lot of perceived randomness in the currency market, there’s one thing that’s a constant—new Forex traders lose money and most of them fail. It’s just a fact. Regardless of your background (degrees, experience in other markets, etc), you’ve got a high likelihood of failure. I’ve identified three reasons why this is and I want to share them with you, so you can have a higher chance of success.

Undercapitalized

Being undercapitalized is a huge reason why most people fail. While this reason isn’t limited to just currency trading, I think it plays a bigger part in Forex because of the leverage potential.

What ends up happening is new traders trade above their level and get margin call after margin call and/or they suffer losses way out of proportion to their capital size. So rather than being allowed to stay in their position and having it come back to the right side of the transaction ledger, they are automatically closed out at a loss.

If you’re using more than 10 times leverage, you’re asking for trouble. In fact, you really should aim for 1-3 times leverage at most. For a micro account that will be trading $1,000 lots, you should have at least $300 to start. And this also means you’re limited to 1 lot, 1 position at a time. Ideally, you want to have at least $1,000 to start on the micro level.

Yes, you can start with as little as $25, but expect margin calls and the need for extremely tight stops.

Trading Too Much

Another reason most new Forex traders fail is making way too many trades. Think about it. You really don’t know what you’re doing yet and have no experience, so how can more trades be a good thing?

By placing more trades, you’re giving yourself more times to be wrong and more opportunity to lose money. This is a big one because we’ve all traded too much to start out. It’s apparently in our nature. Usually the only people who don’t trade too much to start out are the ones who are very scared—and they just end up leaving.

To break this habit, limit yourself. Trust me, it’s easier said than done. It seems most people need to lose all their money a couple of times to eventually figure this out. Down the road you can trade more often, but to start off you really need to limit your trading big time.

Unrealistic Expectations

Many new currency traders start in the market with the fantasy of running $100 to a million dollars tomorrow. As a result, they commit the first two cardinal sins of currency trading I mentioned and usually end up as roadkill.

I saved this reason for failure for last, because it encapsulates the first two and many other mistakes you might make. If you can temper your expectations and have a desire for a realistic outcome, you’ll be ahead of the game and you’ll have a far lower chance to make huge mistakes.

Think about this for a moment. If your stock portfolio gains 20% in an entire year, you’re ecstatic. That’s a great year—sure beats watching it go down day after day. Keep those type of years up and you’re doing well. So why do new Forex traders expect to do 20% in a day or week?

The fact that you can leverage your capital means bigger gains are possible, but you need to be realistic. Here’s a fact. If you get to a point where you’re able to grow your capital by just 5% per month, you’re on the “road to riches.” Now it just becomes a capital issue. Think about it. That’s 60% per year.

Here’s $10,000 in 10 years @ 60% growth: $1,099,511 (and some change). So, you don’t need crazy, uncommon return rates. At 5% growth each month, you can turn $10,000 into a cool million.

I almost hate to say this, but it’s possible to do even better because currency trading is the mother of all opportunities. But, you need to grow into those type of returns. Set your initial goals in a positive, highly obtainable fashion and go from there.

The reason I gave you the growth example wasn’t to fill your eyes with gold. It was just to show you how being realistic with small returns can end up being a large amount of capital over time. Keep your goals realistic. If you’re just starting out, don’t get too excited if you’re up quickly. Remember, this isn’t a sprint, it’s a marathon. Protect your capital. If you happen to be up 20% or so when you first start trading, use that as your sign to pull it back. Don’t give up your gains.