Why most people lose money on FX trading - April 03, 2019
More than 90-95% of people lose money on forex trading. Why? Because currency trading is not as easy as most people think. It needs great knowledge of the market, devotion and discipline. Read our post to find out what other reasons make so many people lose money on FX!
A breath-taking number of people lose money on currency trading, according to several statistics about the market. That doesn’t mean it’s impossible to make profit on the forex market, but most traders are unable to be successful for several reasons.
More than 90% lose money
Several sources state that 90-95% of traders lose money on forex. On Vantage Point Trading one former trader confirmed this data. Based on his experiences, only 3.5-4.5% of the total 400 people he met made a profit. He added that other made some profit too, “but not enough to keep them trading”.
He also said that the successful traders he met (himself included) were absolutely devoted to the industry. Trading for them was basically a full-time job, and they learned how to trade professionally and followed the market movements with keen eyes. The ones who lost money had other jobs or weren’t real professionals. Many of them got discouraged too fast (because of losing money or not earning enough to make FX their full-time jobs). The ending was the same for them: they quit without profits.
What are the reasons for losing?
An important reason why people lose so much money on FX trading is the aforementioned non-professional mentality. Many people try trading without real knowledge and devotion to the craft. Investopedia also mentions some reasons (the ones we also often hear when we’re talking with potential clients of ours).
Their top reason is that traders don’t maintain trading discipline and their actions are defined by emotions. (We also wrote about the importance of discipline in the past.) Investopedia mentions that people lose money because they are trading without a plan. Most people fail to adapt to the market in time, and unrealistic expectations can also pose a huge problem for traders, who often want to get rich fast, so they take unnecessary risks while trading.
Leverage is a tricky thing
FX trading has a very special attribute: huge leverage. On most forex markets traders can use borrowed capital to invest. This sounds really good at first: one may invest let’s say $500,000 with only having $5,000 capital. This can lead to higher profits, but it’s quite risky. If they use huge leverage (because it’s so tempting), even small market changes can lead to serious losses. In some cases, a 1 dollar change in a currency can mean a 45% loss in capital.
What’s more, less experienced traders tend to manage their risks worse. Leverage therefore is most risky for people who are already more likely to lose their money anyway. Severely mismanaged risks can speed up losing.
Managing risks wins
It doesn’t matter what kind of investment we’re talking about, risk management is the most important thing to do. That’s not only important, it’s also hard and needs a professional mindset. Trading should be a full-time job, and even then, there’s no guarantee that things work out. What’s more, this is not only true for FX trading, but every kind of trading.
All this leads us to believe that for the everyday investors, choosing a well-diversified and professionally created investment portfolio could be better than currency day trading. It is possible to be successful at it, but it needs great market-knowledge, determination and discipline. If we look at the 90-95% failure rate of FX trading, it’s obvious that many people lack these skills regarding their investments.
Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.