Why Do 90% Of Traders Consistently Lose Money ?

Time and time again you’ll hear people say 90% of traders consistently lose money trading the forex markets.

I don’t know where these figures come nor do I know how true they actually are but I feel like some light should be shed as to why so many traders apparently lose money, its important to note this figure is not just exclusive to the forex market….

Stocks – commodities – bonds, 90% of the traders trading these markets are also said to be consistently losing money.

With so many traders losing money across all types of financial markets it begs the question “What are all these people doing wrong” ?

This is the question I hope to answer today, we’ll start by taking a look at some of the things which are commonly blamed for 90% of traders losing money and try to decipher whether they are the actual reason for so many traders consistently losing or if there is something else which people are doing wrong ?

 

Is It Because Of Strategy ?

We’ll begin by analyzing one of things which is usually blamed for traders not being able to make money from the markets.

Trading strategies are said by many to be the prime reason so many traders fail to make consistent money trading forex.

Not only this but traders themselves will say the reason they’re not making money is because of their trading strategy.

Personally I don’t think trading strategies are the reason why such a high percentage of traders consistently lose money.

For the most part every trader is using a different trading strategy, there may be a large number of methods which all fall under the same category, i.e price action/indicators but each trader is implementing their own small tweaks to these systems in order to suit their own needs.

Therefore it doesn’t make sense to me that trading strategies can be the cause of 90% of traders losing money, there are literally thousands of trading strategies out there, how can it be that thousands of traders using differing strategies are all consistently losing money ?

If the strategy was the reason behind why traders are losing money then it must be the trader who’s at fault, the strategy can’t trade itself, it requires human input in order to function correctly, if the trader is not using the method in the right way then the strategy can’t be blamed as the trader themselves is the problem, which brings me on to my next point…….

 

What About Psychology ?

 

Trading psychology is another thing which many attribute to so many traders not making consistent profits.

The psychology of trading i.e closing trades too soon – revenge trading – holding onto losing trades, is something which does affect many traders although I still believe the number of traders who have these problems isn’t big enough for someone to come along say that it’s the main reason why 90%  are consistently losing.

I think alot of people suffer from mindset related mistakes such as closing trades too soon – not taking trades that meet your trading plan etc but these are not critical mistakes which are going to lose you large amounts of money, it’s the big mistakes like holding onto losing trades which have the capability to make you lose large sums and most traders who have been trading for a year or two do not make these kinds of mistakes.

 

 

Incorrect Money Management

 

Money management e.g trading with a consistent risk size, is something which alot of traders implement incorrectly does this mean that it the main cause of 90% consistently losing ?

I don’t believe so.

If the majority of traders lose due to incorrect money management then that would mean they are blowing their entire account, and its likely they wouldn’t be trading at all. In order for 90% of traders to be consistently losing they must be active in trading the markets, if they don’t have an account they wont be trading, therefore they can’t be consistently losing.

The basic definition of money management is deciding how much you’re going to risk on each trade, correct money management is where you always trade with a consistent risk size, and the leverage you use on each trade is also consistent with the money you have available in your trading account.

Incorrect money management would be changing the size of the leverage on each trade or, taking trades in which you have to risk more than 1% of your total account balance. In some cases these can be disastrous mistakes, placing a trade at 100 – 1 leverage when you only have £1000 in your trading account can and will probably lose you all of your money, these are mistakes which only new traders typically make, if you’ve been trading for longer than 6 months then its unlikely your making these kind of errors as you would have learned enough about the market to realize its dangerous to do these things.

 

The Reality Of Why Traders Lose

 

So far we covered the 4 things which are usually blamed for 90% of traders consistently losing money, while it can be said a large percentage of traders lose because of reasons outlined above it, they are all fixable problems, if your trading strategy isn’t working, change it, if your money management is wrong fix it. Trading psychology is the only issue which may or may not be easily fixable.

I think there has to be something every trader is doing wrong, it may not be intentional and the trader may not realize he is actually doing something wrong but overall there has to be a mistake all traders are making regardless of strategy/money management/psychology.

The 4 Rules

 

Forex trading is like a game, and just like in any other game you may have played there are rules you must learn in order to play the game properly.

These rules affect every player in the game, in forex it means all traders must follow these rules whether they are aware of their existence or not, to not know what the rules are means putting yourself at a severe disadvantage compared to the other players who know the rules and their implications on the market environment.

The huge problem with forex is you have to figure out these rules yourself, there isn’t any books you can read to teach yourself the rules of the market. They can only be discovered by thinking about the inner mechanics of how the market itself works, once you know the rules of the forex market, you can learn the truth on how to trade the markets profitably.

Here are the four rules of the forex market:

  1. The forex market is a zero sum game where one persons losses equate to another persons gain.
  2. Nobody can place a trade unless another person is placing the exact opposite trade
  3. The bigger the trade you want to place the higher the amount of people needed placing the opposite trade.
  4. The market cannot continue in one direction without pulling back or consolidating

These are the rules of the market.

All four of the rules outline above are FACT they cannot be disagreed with.

Every trader in the market follows the 4 rules outlined above even if their not necessarily aware of the rules themselves.

I think if every-trader was given these rules at the beginning of their trading education far more people would be profitable, even rule 1.  has massive implications for the traders knowledge of the market.

If the trader understands the market is a zero sum game then he will know the majority of his learning should focus on understanding when and where other traders are going to lose money, as this is the only way for him to make money.

 

 

The Trend

 

Whilst the 4 rules play their part in traders not making money there is another thing that traders get wrong which if they got right could be the difference between success and failure.

The trend is a concept that is bludgeoned into every trader from the beginning of their career trading the markets.

In every trading book and course you can buy there will be a section dedicated to telling you how the trend is most important concept in the market and failure to follow the trend means you are unlikely to make any money trading.

What I find strange about trading books is even though different books will teach you different strategies the concept of trend always remains the same ?

All the books give you the same advice….

  1. Always follows the trend
  2. The longer the trend has been in place the more likely it is to continue
  3. Don’t try to predict the beginning or end of a trend

These three pieces of advice can be found in 95% of the trading books out there, these are the same books that most traders are likely to have read during their time trading. Now if majority of traders have read these books and followed the three rules regarding trend, could it be possible the reason most traders are losing is due to the definition of trend being wrong ?

The reason I say this is all trading strategies incorporate the idea of trend in some way, nearly all trading strategies fall into two groups, trend orientated and reversal orientated.

Trend strategies aim to get into the market AFTER it has already moved

Reversal methods try to get into the market BEFORE it has moved

Both sets of strategy are dependent on the concept of trend, if there was no trend, these methods wouldn’t work and people would have to switch to trading methods which do not incorporate the concept of trend.

So if for instance the common definition of trend was wrong, It would mean the reason all trend traders and reversal traders are losing money is because their understanding of trends is incorrect, or their implementation of trends in their trading strategy is wrong.

I think the wrong definition of trend is a far more probable candidate for being the sole reason why 90% of traders are consistently losing than the strategy/money management/psychology problems we discussed earlier.

Think about this……

90% trading strategies rely on trend….

90% of traders are consistently losing money……

Why do you think 90% consistently lose ?

 

 Summary

 

90% of traders lose money not because of the strategy they use or the mental challenges trading brings, they lose due to their lack of knowledge on how the forex market really works. If a new trader learned the 4 rules of the market before he began learning anything else within a short space of time he would be consistently profitable, it took me yeas to figure out these rules and even longer to understand the implications they had on the way people participate in the market.

A trader who is new to the forex market wouldn’t have this problem as all of the learning he’d be undertaking would be based off the four rules of the market, he wouldn’t be reading books on technical analysis to understand how he should trade, he would be reading them to understand how other traders trade because he knows his profits are ultimately going to come from other traders.

It’s the lack of knowledge of the way the market works coupled with the wrong definition of trends that makes people lose money, not the strategy/psychology/ money management problems than only a minority of traders have.

 

 

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