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Most people think that forex trading is a simple way to make money, but the reality often sets in as soon as you start trading for real. Indeed many industry insiders believe that only around 5% of forex traders actually generate profits in the long run. So why do so many traders end up losing money?
Well I believe there are five main reasons.
The first reason is because many traders try and trade against the overall trend. You probably think it’s relatively straight-forward to trade price reversals when you believe the trend is over, but this is a great deal harder than it first appears. While you may manage to generate a few winning trades trading this way, you will also notice that in most cases the price will continue moving in the direction of the initial trend. It’s generally a lot easier to trade with the trend at all times because that way you know that you have probability on your side.
Another reason why the majority of traders lose money is simply because they employ poor quality forex strategies. You will find that lots of trading systems look good on paper but when you put your hard-earned money at stake it’s often a completely different story. That’s why you should always do thorough backtesting and at least test each method out on a demo account for a good few weeks before you start risking your own money.
The third reason people struggle to make any money trading the forex markets is because they concentrate on developing short-term forex strategies. This is also known as scalping and while it may be quite exhilarating to generate lots of winning trades of say 5-10 points throughout the day, it’s very hard to do because there are so many random price movements on these short time frames. Furthermore you will also find that many forex brokers do not approve of this style of trading, so you’re probably better off trying to trade the longer time frames.
It’s also not a good idea to over-leverage yourself because by doing so you are always at risk of losing a large percentage of your capital whenever you suffer a losing trade. The recommended strategy is to only risk around 3% of your trading capital per trade and certainly no more than 5%.
Finally one other reason why people end up destroying their capital is because they decide to use an automated expert advisor to trade the markets for them. While there may be a handful of profitable ones on the market, it should be pointed out that many of them will will turn out to be unprofitable in the long run. This is largely because of the way that they are designed. If they use really big stop losses but only look to capture small gains, then you should be very wary because a handful of unsuccessful trades could destroy your capital.
So if you do want to join the 5% of currency traders that do actually make money, then you should take these five factors into consideration.
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