Oil Crumbles, Cable Reverses and the Dollar Continues with Bullish Structure. Trend-Line Support as New Resistance. Bull Flag Break Opens Door for Continuation. Quantitative analysis, algorithmic trading, and retail trader sentiment. Strong growth in forex trading has brought a significant increase in the number of new traders, but the influx has been matched by a similar outflow of existing traders.

This article discusses arguably the most important question of all — why do many forex traders lose money?

The Number One Reason Why Most Traders Fail | Investopedia

Many forex traders have significant experience trading in other markets, and their technical and fundamental analysis is often quite good.

The above chart shows the results of a data set of over 12 million real trades conducted by FXCM clients worldwide in and It shows the 15 most popular currency pairs that clients trade. The blue bar shows the percentage of trades that ended with a profit for the client.

Red shows the percentage of trades that ended in loss. So if traders tend to be right more than half the time, why do most forex traders lose money? The above chart says it all.

Why Over 90% of New Forex Traders Fail To Make Money

In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite bring right more than half the time.

They lose more money or their losing trades than they make on their winning trades. While traders were correct more than half the time, they lost nearly twice as much on their losing trades as they won on winning trades losing money overall. Countless trading books advise traders to do this. When your trade goes against you, close it out.

This is difficult to do because it is going against the great deal of work and research you performed to first enter the trade.

Closing it out at a loss is admission that you were wrong —invalidating everything you did that went into that trade. This is exactly the mistake we watch time and time again: And to be clear, a trade can come back and there will definitely be times that you will have avoided a loss by holding onto a small loser. But those large losses completely ruin the potential reward on your overall trading. Conversely, when a trade is going well, do not be afraid to let it continue working.

Trading As A Business | Investopedia

You may be able to gain more profits. After taking a series of losses or perhaps one especially large loss, it is natural for us to take profits on a trade due to fears that it can go against us.

Taking profits also proves that we were right—the hard work that went into the trade was valid and it feels good. Yet letting losses run and cutting profits short is how many traders lose money.

Avoiding the loss-making problem described above is pretty simple in theory, though it is admittedly difficult in practice. When trading, one rule is critical: This is nothing groundbreaking, and almost every trading book will tell you the same thing. If you risk losing pips to make that same , then that same ratio is 1: Unfortunately the true win percentage was 57 percent and helps explain why most lost.

You should always use a minimum 1: That way, if you are right only half the time, you will at least break even. Generally, with high probability trading strategies, such as range trading strategies, you will want to use a lower ratio, perhaps between 1: Remember, it is natural for us to want to hold on to losses and take profits early, but it makes for bad trading.

We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning.

Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. There is a reason why so many traders advocate it. You can readily see the difference in the chart below.

Forex Education: Why do Many Traders Lose Money?

This system was developed to mimic the strategy followed by a very large number of FXCM clients, who tend to be range traders. The red line shows the results if we use stops and limits. The improved results are plain to see. In comparing these two results, you can see that not only are the overall results better with the stops and limits, but positive results a re more consistent.

Drawdowns tend to be smaller, and the equity curve a bit smoother. The next chart shows a simulation for setting a stop to pips on every trade. The system had the best overall profits above 1: In the chart below, the left axis shows you the overall return generated over time by the system. You can see the steep rise right at the 1: Whenever you place a trade, make sure that you use a stop-loss order.

Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for 2: Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away.

If you have a stop level pips away, your profit target should be at least pips away. View a presentation from the FXCM Trading Expo on the same materials. When the period RSI crosses above 30, buy at market on the open of the next bar.

When RSI crosses below 70, sell at market on the open of the next bar.

Strategy will exit a trade and flip direction when the opposite signal is triggered. When adding in the stops and limits, the strategy can close out a trade before a stop or limit is hit, if the RSI indicates that a position should be closed or flipped. When a Stop or Limit order is triggered, the position is closed and the system waits to open its next position according to the Entry Rule.

This article is a part of our Traits of Successful Traders series. The DailyFX Research and Education team has been closely studying the trading trends of FXCM clients, utilizing the trade data at FXCM. We have gone through an enormous number of statistics and anonymous trading records in order to answer one question: You can learn more about the project and see further research at the Traits of Successful Traders webpage.

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