How to Avoid Losing Money in Forex? A frequently asked question among forex traders. The forex market is the largest financial market worldwide which gives it an edge and high popularity among traders. The accessibility and approachable technology have made the FX market a desired investment even for traders with the least experience and low capitals. However, forex risks are often ignored by traders who think it is a very easy and quick shortcut to reap higher returns.
The truth is that any kind of trading or investment comes with risks that every trader should take in consideration is shockingly overlooked. While the reality is forex trading demands high levels of dedication to learn how to trade and establishing a solid foundation of Forex knowledge.
According to researchers, up to 80% of beginner forex traders quit trading once they experience money loss. If you’re serious about forex trading, then you must accept the fact that winning and losing are two inevitable phases of trading. Only experienced and successful traders know how to play the game by the rigid rules. Trading in such a volatile and unpredictable market requires knowledge, plan and it takes time.
So, before we move on to how to avoid losing money in the forex market, let’s first know why most traders lose money in the first place. Regardless of the frequent losses any trader can encounter every while, there are reasons why beginner traders can’t keep up with the market and end up losing money and quitting.
Why Forex Traders Lose Money
Forex trading requires knowledge and planning on multiple levels. Without a solid understanding of market basics and an ongoing analysis of the ever-changing environment of the market, trading will be far from lucrative. Here are the top reasons why forex traders, specifically beginners, lose money in the market.
- Overtrading – is one of the most common trading mistakes that lead to money loss in the forex market. Either trading too often or too big. It can be caused by market addiction or unrealistic high profit expectations. Beginner traders are often overwhelmed by the idea of making high returns by risking too much. This is practically irrelevant unless a solid risk management strategy is followed.
- Failure to adapt to market conditions – Since the forex is not a static market, assuming that a proven successful trading plan will be enough to generate profits all the way on is another reason why traders end up losing money. A successful trader should be able to track down market changes and adapt to different situations. Flexibility and developing a trading plan are essential to trading success. Market changes are not always sources of risks, but they create new trading opportunities as well. Failing to adapt and keep up with these changes directly affects trading results.
- Putting too much at risk – Risk limitations makes all the difference between trading and gambling. Most beginners think that by putting too much at risk, they elevate the chances for bigger profits. This is totally wrong. Improper application of forex risk management rules is a major reason why traders are more vulnerable to lose money quickly. Mastering risk management can significantly improve chances for successful forex trading. Using a stop loss and an established risk-to-reward ratio is very essential to limit your losses in the market.
A risk/reward ratio (RR) is a measurement that helps you plan both expected profits and potential losses for your positions. It helps in identifying how much money you will risk per trade. By exceeding that amount, you are violating your own rules. The most common risk rate per trade is 1%. You can also consider a proper risk-to-reward ratio of 1:2 or 1:3, meaning that potential profit should be triple or at least double the potential loss on the trade.
- Not accepting responsibility for mistakes – Beginners often tend to blame the market for their losses and trading mistakes. But a successful trader develops the ability to accept responsibility for his own mistakes rather than wasting time on throwing blame on anything else. Either by cutting losses early or moving forward, you have to accept responsibility and act according to whatever situation you find yourself in. Learn more on how to handle trading losses.
- Trading without a plan – Another major reason why traders lose money in the forex market is trading without a preset plan. A trader should invest effort and time into developing a trading plan that includes proper risk management, sets rules for choosing good entry and exit points for trades in addition to solid money management tactics. Having a trading plan allows traders to follow rules and keep their eyes on goals. Without a plan, a trader will be kept unguarded against market changes and easily distracted by emotional decisions.
10 Ways to Avoid Losing Money in Forex
Just because it is easy to access the forex market doesn’t mean that trading and keeping a profitable record requires no extra effort from your side. More traders enter the market every day, but those who do their homework and invest more effort can stay in the game. The following are the top tips for aspiring forex traders to avoid losing money and stay in a highly competitive and challenging market environment.
Do Your Research and Know the Market
There is a saying that knowledge is power, and that applies perfectly on forex trading. If you’re looking for a successful trading journey, you have to be serious about doing your homework. Research, gaining knowledge and getting to know market basics will help you achieve your trading goals. The more you know, the better trader you are.
There are no limits for market knowledge, especially for a highly dynamic environment. Invest time to know more about how the market works, best currency pairs to trade, trading strategies and the best time to trade. Check our detailed guide How to Learn Forex Trading
Train and Gain Experience
In trading, knowledge is more powerful when you practice it. You can easily gain trading experience using small initial capital. You can also trade with zero risks when you open a demo account where you can experience live trading with virtual money. Such accounts allow you to practice your knowledge and get familiar with the market. They can also be utilized for testing new strategies and exploring the trading platform of a forex broker.
Trade with a Reputable Forex Broker
Trading with a reliable forex broker can affect your trading. Before stepping into the world of forex trading, spend some time researching for a reputable broker that can assist you in achieving your trading objectives. The integrity of a forex broker is crucial for the safety of your deposits as well as succeeding in the market. A trusted broker will provide better trading conditions, a variety of trading instruments, accounts that fit your goals and capital in addition to solid forex education resources. Check broker’s regulations and take your time exploring the trading services it offers. Here are 10 Tips How to Choose the Best Forex Broker
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Analyze and Keep Informed
Forex trading should always be based on market analysis. Whether you prefer fundamental analysis or technical analysis or prefer mixing the two of them, make sure you open trades backed by analysis. Keep up to date with market movements, events and news that may affect your positions.
Trade on the go and keep up with market activity from the convenience of your phone or laptop, download Metatrader 4 (MT4) from AximTrade and stay connected to the market. Open a forex account and get started with a whole kit of technical analysis indicators and tools.
Trade According to a Plan
Trading with a plan serves as a guiding framework is very crucial to achieve consistent profitability in trading. It is pretty much like a road map that keeps you on track to your trading goals. A good plan will help you in taking rational trading decisions, by sticking to its rules. Know how to develop a Successful Forex Trading Plan
Calculate Trading Costs
Beginners often discard the importance of calculating trading costs despite being a crucial factor in realizing trading profits. Costs can include spreads, commissions or swap rates for every trade. It’s important to know that costs differ from a broker to another, and even vary for different instruments. These costs are also affected by the type of trading account you choose. Check 10 Things You Should Know Before You Open a Forex Account
Use a Reasonable Leverage
Forex leverage is unique in its available levels that allow traders with a small capital to trade on a larger scale by multiplying their investment. Nevertheless, leverage is a double-edged sword that amplifies potential losses as well as profits. If not used wisely, leverage can negatively impact forex traders by increasing their market exposure. Choosing the right leverage level plays a vital role in avoiding money loss. Read more on how to choose the Right Forex Leverage.
Be Open to Change and Adapt
The forex market is popular for its ever changing and fluctuating nature. Even the most successful plans developed by top traders require constant development and adaptation. Being flexible and able to adapt your approach will help you keep up with market changes and stay profitable in different market conditions. Work on developing a successful trading mindset that can keep you on track to success and avoid losing money.
Set your Limits
An essential part of your trading journey is to know, set and stick to your limits. This includes your risk/reward ratio, leverage level and trading decisions. The fluctuating market will challenge your ability to follow your rules, you will have to know when to interfere, wait or take a break. Remember that discipline is your best friend.
Once you get prepared for live trading, starting small is a smart choice. Maybe starting with a lower capital can limit your profitability, but it will also protect you from risking too much especially if you’re still in the learning phase. Remember that live trading is a whole different experience from demo trading, where your emotions can get really engaged.
Risking real money can generate feelings like greed and fear that you’ll never experience when trading with virtual money. Read more on how trading psychology can affect your decisions. Following a trading plan will help you keep you away from emotional trading.
Thanks to leverage, a trader can trade Forex with $100 and gain profits. Starting small allows traders to evaluate the trading plan, cultivate their emotions and gain experience. By time, you will manage to grow your small forex account.
Trade Forex with Reliable Forex Broker
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