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Wednesday, May 18, 2011

Why Do 95% Of Forex Traders Fail?

95% FailThe popular belief is that 95% of forex traders fail and lose money. I have no way of telling if that figure is true but it’s a figure that is commonly touted on forums and by many people that are apparently in the know.
Whatever the figure is I suspect it’s pretty high but what causes newcomers to forex to lose money? There’s so many good resources available online that you would have thought new traders may have more of an inkling on what and what not to do. But everyday new traders get sucked in by all the hype and lose a packet.
Account Size
In theory account size shouldn’t make a difference (My Wife tells me size doesn’t matter). If your trading plan is to use 2% of your balance per trade and your are looking for a R:R of 2 then on a balance of $10K that would mean risking $200 and hopefully make $400 on a trade. Not a bad days work.
But in reality this is what usually happens. A new trader will have been demoing for a few weeks with a pretend balance of $10k. He’s done well and has the bug for forex. He already has visions of retiring early and how great this will be. Unfortunately newbie trader hasn’t got $10k hanging about to drop into a live account but he manages to scrape together $500. He understands the power of compounding so it will only be a couple of months until his account grows to a decent size. He makes a few trades using 2% of his balance with a R:R of 2 and makes $20 profit per trade.
Now if our intrepid forex newcomer sticks to this plan he may do well. But it’s going to take a long time to grow that account to any decent size. Even if he manages to maintain a profit of 10% a month it will still take 2.5 years to get to $10k. So our new forex trader looks at his trades and thinks to himself that if he ups his trade size to 5% or even 10% he will get to his target much quicker.
I am sure by now you know what’s going to happen to our newbie. Sure enough he ups his trade size and after a couple of weeks has totally blow his account. The problem is that whilst in theory you can trade $500 exactly the same as you can $10,000, psychologically because you are only making pennies you will get greedy.
Now I am not saying that every new forex trader needs to fund a live account with $10k. I think you need to spend at least 3 months demoing a system with a pretend amount that reflects realistically what you could afford to start trading live with. If you can only afford $500 then start demoing with that. It will at least be a more realistic experience of what you may make when you go live.
I think a good way to expand your account is once you are consistently profitable trading small, start adding a small amount of funds every month. For example get a standing order setup at your bank to transfer $100 dollars every month to your brokers account. That way you can build your account slowly and compound your earnings at the same time.

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