Licensed Moneylender Traders
Why Most Forex Trader Lose Money?
Traders predict the market direction correctly half the time, yet most traders end up losing money, according to a reputable report. Sounds contradictory, right? After all, if you are right 50 percent of time, you should at least break even. Well, in theory, that should be really the case, but in reality it is not so. Let’s see why and what you, a beginner trader, should do to make money in trading.
Cut your losses and Let your profits run
There’s only one reason why most traders lose money in spite of being right half the time: their average loss is greater than their average profit.
So, in effect, to make money in trading, traders don’t really need to be right more times than they currently are. Instead they need to cut their losses and let their profits run.
While elementary, this is the secret of making money in trading. And it is not that traders don’t know this, but they fail to put it into practice.
Because loses hurt us more psychologically than profits give pleasure.
Daniel Kahneman, a Nobel Prize winner and a clinical psychologist, came up with this finding. Of course, his study wasn’t to understand traders’ mentality but human behavior, but the finding succinctly, yet thoroughly, explains why most traders lose money when they predict correctly half the time.
They let the trade run when it is going against them, hoping the tide will turn or simply because of inertia brought upon by tension and stress, and as a result end up losing far more than what they would have had they booked the loss early.
The opposite happens when the trade is going in their favor. They cut the trade short and take whatever profit they are getting.
Define Stop Loss—and Stick to It
Human beings are psychologically engineered to take more losses than gains, but that doesn’t mean we can relearn. An effective way to do that is by defining your stop loss for each trade—and sticking to it.
As most traders will tell you, defining stop loss correctly, although demands expert chart-reading skills, is relatively easy. It is following your own strategy that is difficult, because it requires great discipline.
With that said, if you can show strong discipline, you can earn money by being right just 50 percent of the time—and that’s not too bad for a beginner. With time, your chart-reading and market-predicting skills will improve, so will your profits.
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