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Why do 80-90% of beginner Forex traders lose ALL of their money?

Discussion in 'Beginners Bootcamp' started by cowmadagan, Jan 12, 2010.

  1. cowmadagan

    cowmadagan Sergeant

    Dec 23, 2009
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    First, I'm going to ask that no one adds a comment of 'Thank You' to this thread, because 1) what I say is far from the last word, and 2) I'd like this thread to be a resource for ONLY those who wish to read an entire thread.
    I'll put this on my 'monitored threads' list and take the number of viewers as all the thanks I need....I'm a Buddhist...we don't do gratification.
    That said, I'd also have to ask, despite my lack of tenure, that each person who reads this thread to make a note on paper of the comments you'd like to make and wait to see if someone later in the thread has already addressed what you intend on commenting on.

    Why do so many beginner Forex traders lose all of their money?

    First, the FPA is here to protect you from the non-market risks, namely How to select a forex broker based on informing you how trustworthy the broker is, while trying to protect traders and prevent malicious slander in the form of spam. Another is to protect you from poorly programmed bots, or any other way to get your money away from you other than actual market movements.

    I'd like to first point out that, on the same token as how an eight year old can't actually be a good judge of the quality of their teacher, if you haven't done enough reading then you'll inexorably feel that the movements of the market are chaotic. Now, they are chaotic, but to a surprisingly small degree to a well-informed and experienced trader. To sum up quickly, an experienced trader can profitably trade any purchasable or salable commodity, currency, or transferable intangible object.
    One can't make that assertion on one's self just based on a successful month of trading on a demo account, and that means that both experience and knowledge are required before the jury can be let out on 'did this broker cheat me.' This is especially true because the traders on FPA are using different brokers, charting systems, and data feeds for current rates, so we can see if there's a discrepancy between the 'real' rates in historical fact and those that have been digitally manipulated by a broker for the broker's profit. I use this specific example to show one regular complaint of inexperienced traders to show that markets can be a major cause of the trader's complete loss of account independent of the broker.
    For this matter, I'm going to avoid discussing non-market, or scam, reasons for complete losses of accounts.

    First, have you noticed that most demo accounts let you trade with $50K?
    In an article I have from just before the credit crisis, to be in the wealthiest 10% of the world's population, you need to have a net worth of $61K. At 100:1 maximum leverage in an account with standard lots, if you traded one lot the wrong way with no stop you'd have to be off by fifty US cents to empty your account. We saw the Swissy go from parity to twenty-one cents over during the credit crisis, but a ten cent drop is a real event. A one cent change is substantial.
    It all seems simple. That said, if you have a micro account and you open it with $500, you'd be in the same position. $5000 in a mini account, and it's the same deal.
    Wait a second...two things come to mind here. One, two times 5K is enough to buy a cheap car, and most people don't buy a car with a 50% downpayment. Of course there's the other matter of whom you'd trust with half a car of your money...a fool and his money are soon parted they say.
    Back to the point though is most people don't have, or can't afford to lose 5K, so logically most forex accounts are started with less.
    So you learn on a 50K demo account, and maybe you wing it and figure out rudimentary money management techniques for yourself. For example, maybe you figure out that although you only actually lose money when you hit a stop loss, you have to use stop losses for 1) when the basis of your prediction is clearly no longer likely or 2) capitalizing on the ability to reenter at a position even further away from your stop loss in order to get the profit from the new entry point to your old stop loss, plus the profit you initially attempted to gain. Maybe you also figure out to set your stop loss as less than your expected profit.
    The first reason why beginners lose all of their money is because they're underfinanced. If you do a demo with a 50K account, you should only attempt to get half of the profits you aimed for on a live 25K account, a fifth on a 10K, and so on. If you are underfinanced then you won't have as many chances to absorb losing streaks (they really do happen to everyone), or deal with slippage or news events (expected or unexpected). Also, most people think they can use the same number of lots with the same risks on their new live account with their $500 as they could on the $50K, and they can't. I call this 'target management'.

    The second reason why beginners lose all of their money is because they risk too much per trade. They're blinded by the potential profit, and they're out before they've had a chance to learn from their mistakes. Simple arithmetic shows that 19 bad trades risking 10% of current account per trade leads to a loss of over 80% of your account, where 19 bad trades at a risk of 2% is a 30ish percent loss. If you want to stay in the game you need to make sure you can be wrong a lot of times before you're out of cash, so I call this 'money management'. 19 bad trades can happen because you bet against the trend, news changed the fundamentals, you flip-flopped your long and short positions trying to catch the trend, you keep on getting nailed by straddling with double OCO orders, you're too impatient, you're overwhelmed by emotions, you're dealing in too many related pairs in the same direction, or your frikken cat sat on the keyboard.

    The third reason is because they don't set a risk to yield ratio, or just trade from the gut. A risk to yield ratio is set in order for the profit from one successful trade to compensate for several unsuccessful trades. Thus, if you have a 1:3 risk to yield ratio, you set your stop loss at say 30 pips and your take profit at 90 pips. I also tend to find that if you set your stops too tight that it doesn't give your guess much time to be right, so I never set my stop at less than 15 pips. Now, I must admit that I don't stick religiously to this risk to yield rate if I'm actually watching the charts; I'll sometimes take profit and cancel my OCO take profit/stop loss order. I'll definitely stick to this idea if I have to leave the house or go to bed. If you have a full-time job and are forex trading to personally manage your savings, this is the only safe option. If you have a 1:3 risk to yield ratio you can be wrong twice and right once and still come out with a profit. I call this 'risk management'.

    The fourth reason is overconfidence in the line studies that come with charting packages. None of them are 100% accurate all of the time, and that's because the freakin things ain't omniscient. Ichimoku means 'one look' but I promise that nowhere in its algorithm does it include, "Dubai is totally not going to have enough flow for that Dec. 09 $2 Billion maturing loan." In many ways a line study on a chart is like body language. If a person crosses their arms they might be defensive, threatened, disassociating themselves from the others...or just cold. You have to look in clusters to figure out what's going on. Sometimes you need to turn them all off and take a look at the price line, and on several different time charts.

    The fifth reason is because you didn't understand all the parts of the last sentence of the second reason's paragraph. Ha! Tricky...forcing you to read the stuff again...THAT'S A GOOD THING!!!

    The sixth reason is that we get spooked. Either we lose money we can't afford to lose and don't have enough to continue after learning from our mistakes, or just lose enough to hit our confidence and make us feel like we'll never be able to do it. Never is a long time, and as I've posted several times, the only way to finally fail is to quit. This doesn't mean that you should never quit; it means you should only trade with small amounts of money until you get confident. Let's face it; it wouldn't take much to beat the bank's interest rates these days if you only do slam dunk trades. Those are the ones where a currency is clearly undervalued and is in dire need of a correction. The problem is that when you're dealing with spreads of about 4 pips online instead of the hundred to hundred-fifty pips at a bank, it's hard not to get involved too early. If you're patient and keep abreast of the news, you limit your risk by a fair chunk.

    We really do wish you luck, and the fact is that not everyone has to lose...if every one in the world was in some freakish synchronous rhythm in the markets then we actually could all profit with no loss. I wouldn't get my hopes up for that though.

    Be Good, and keep your eye on what'll matter more on your deathbed than in your bank account.
    #1 cowmadagan, Jan 12, 2010
    Last edited: Jan 14, 2010
  2. Pharaoh

    Pharaoh Colonel

    Oct 3, 2007
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    I'm going to get out of character and give the short answer since Cowmadagan (can I call you Mad Cow for short? - hee hee!) did the long version already.

    Bad broker selection. No point in making money if you can't withdraw it.

    Bad risk management. A perfect broker will still margin call you if you screw this up.

    Wasting money on products that may not even be right for the trader, even if they did live up to the promises on their websites.
  3. Awais Rasheed

    Awais Rasheed Private, 1st Class

    Jan 23, 2009
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    Well everything and all been said here. Only want to add what my experience tells me in this business or any other business that "money makes money." You should be sufficently funded and follow your money management properly so that you don't loose your hard earned money.
    And the other most important thing is a proper guide and training.
  4. witsnpips

    witsnpips Recruit

    Jan 5, 2010
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    Well said Pharaoh.

    I've had a couple of bad experiences in the past with certain brokers, but won't name them here.
  5. fxfreashman

    fxfreashman Recruit

    Mar 5, 2010
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    Dear cowmadagan , thank you for this thread
    Just to Warn all the newbies, don't do it, like me.
    everithing is said here, but want to share with all of you my bad luck
    actually just my stupidness as a newbie.
    I was not ready for real trading, but I do it.
    I opened real account, I wanted to open Micro, so far so gut :)
    The request was send, after that is the fund 1400 USD.
    My account was create but instead micro was pro, so far ok. but insted 1 micro lot was small lot, well thought from provider.
    Like all the newbies, or more of them, I just thinking that the provider is knewing why
    was created standart account.
    I mean, maybe thats enough money or so, but at first I was nervous to try my knowlege hee hee, really stuppid.:mad:
    After some losses I saw that it was not the right way, and tryed to change my Standart Account into Micro.
    Still no answer, at last I have removed my money, the rest^^
    So to ALL Newbies:
    Please READ and ASK in Forums like this, before you made my Mistake
    good trading all
    FaisalXM likes this.
  6. RahmanSL

    RahmanSL Major

    Jan 16, 2010
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    Hi cowmadagan,

    Good and useful article!

    I see you are a Buddhist, and that means you can meditate to clear your mind before every trading day; right? : )

    As I posted in another tread, I have started my “trading strategy” since 1st March 2010 on a usd5k Demo account, basing my “buy” and “sell’ on I, 5, 15, 30 minutes charts.
    Up to closing market time on Friday 5-March-2010, I have brought that account to usd14,341.03 with still 5 opened positions showing a positive usd628.39 and free margin of usd14,182.84

    I have lost money on 3 positions mainly due to pushing the wrong button. Instead of “Buy”, I entered “Sell”.
    On two positions I wanted to open, I pointed the cursor in the “Close” trade…twice…and ended unintentionally closing two opened positions with usd136.03 & 145.14 loss each. This taught me never to “pop-up” a window from already opened positions as this type of mistakes can and do happen.

    I do not set “Stop loss” anymore as I have read, and concur, your comments and from elsewhere the logic of being “closed out” with just a couple pips from market reversal due to preset SL. But I make sure there is plenty of “Free margin” to prevent “forced closure” of positions due to insufficient funds.

    Here is a “funny” incident in my trade recently.
    As I mentioned above, I opened two positions by mistake (i.e. I meant to open with “Buy” but entered “Sell”).
    For the better part of the week, I was debating whether to close both positions as I was over usd2k in losses in these 2 positions. But I did not close them because I had plenty of “Free margin” and I thought I would ride the losses until Friday 5-Mar-2010 and then close them before the market ends, hoping by that time my losses would be reduced due to market reversal.
    As you can see, the market did reverse and I quickly closed one position with a usd36.02 loss, but couldn’t get myself to close out that larger loss just yet. However, when I finally decided to take my loss to close out that position, I was largely surprised that instead of a loss, that position showed a usd598.43 profit. Needless to say, I immediately closed it.

    2010.03.02 16.34 Sell Size: 2.00 Price: 1.5009
    Time (closed out) 2010.03.05 16.26 Price: 1.4976 Profit: 598.43

    2010.03.03 06.01 Sell Size: 1.00 Price: 1.5081
    Time (closed out) 2010.03.05 08.43 Price: 1.5085 Loss: 36.02

    I have come across statements, regarding Demo accounts, like “Fast execution, no requites, no slippages” time and again here in FPA and elsewhere. However, I have been experiencing on both my Demo accounts with FXopen and Tadawul FX “delayed execution, re-quotes, slippages, and off-quotes” during volatile market movements. I also have many open positions “forced closed” due to insufficient margin balance. Isn’t this exactly what is common in Live account too?

    One thing I still have not managed to control is opening too many trade positions at any one time. Until I can get that type of discipline, I will remain a Demo trader.
    Anywhere, I still got 3 ½ weeks of serious Demo trading strategy to prove that my “strategy” works; right? : )

    All the best!
  7. Eric Alyea

    Eric Alyea Master Sergeant

    Jun 16, 2008
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    Document your “REAL” money

    This is why I had to make a trade checklist just like you use in airplanes for take off and landing (opening and closing a trade?).
    You need to document your “REAL” money, every cent, every time:
    Broker (Company flying with)
    Symbol/Pair (EUR/USD etc.) {Aircraft ID e.g. N7542B on the tail)
    Units/Lots (wt. load manifest, people, cargo etc.)
    Buy/Sell (V1, V2, Take off decision speeds, stay on the runway and abort, or fly and pick where to crash, ground crash/air crash. Your moving deal with momentum).
    Take profit (Destination airport)
    Pip spacing (navigational landmarking aid's to get to a destination){Well, the way I use it, cashing in on the journey along the way}
    notes on flow (Weather reports, “Why look at them Your going to fly through it ANYWAY”, yes they help)
    I’m a dummy. For real money, I use real paper. I don't trust computers/either space:nerd:

    "Pulling the trigger" log down your kill's and how it was done.
    You learn more from remembering your good shot's than analyzing your, "If’n I'da done that" shot's
    #7 Eric Alyea, Mar 7, 2010
    Last edited: Mar 8, 2010
  8. cowmadagan

    cowmadagan Sergeant

    Dec 23, 2009
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    For Rahman I'd like to point out that you really shouldn't..*wink* tell your current broker *wink* to allow you to extend your demo period or *wink* that you're fairly sure that they're legally required to do so.
    If you don't do that, you definitely shouldn't *wink* use a different email address or worse *wink* create another email address for the specific purpose of trying a different broker for their demo period.

    You wouldn't buy a car if you only had one month to decide after using a simulator.
    I guess I should say that you wouldn't choose a Porsche over a Lamborghini after only playing Need for Speed.

    Get your trading working first. Right now is one of the most bizarre and precarious times in the markets, and leveraged trading is no safety net for the hazards of the current situation (like potential of hyperinflation). Three weeks is totally insufficient.
    Commercial EA's base their advertising campaigns off of far longer periods, but they mostly choose those periods because of their complete inadequacy during the periods before the reporting period.
    An example is that you'll never have a losing trade if you start a minilot account with 100K and have a maximum of 5 active lots where no more than 4 of them are in dependent directions (dependent like if you had all of these open poslons: long XAU/USD, EUR/USD, GBP/USD, AUD/USD, NZD/USD, AUD/JPY, EUR/JPY, GBP/JPY, CAD/JPY AND short USD/CHF, USD/CAD [or vice versa]) and you waited two or three years for the positions to become profitable.
    Sure, the pound has dropped about seventeen cents in the last six months or so. Will it go back up that high this year? Maybe..
    Basically spastically big stops and relatively tight take profits make money if you have the margin, time, patience, and lack of ambition, but you have to realize that stopping out affords you a much more competitive entry point.

    As for Eric's (excellent) point, I thought originally that making lists were for people with lesser minds. They aren't. Unless you're just playing with the numbers because you'll never have to worry about your health or your job and the losses and expenses they'll accrue, you should be reading a list that you've written often enough to make sure that you don't open a position without it satisfying your whole list.

    PS. As for meditation, I try to focus my mind as often as possible...it doesn't matter if I'm opening my mouth, opening a trade, or taking a whizz. (sorry for the image)
  9. RahmanSL

    RahmanSL Major

    Jan 16, 2010
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    Ok, if I am not confident & comfortable with my “system”, then as a matter of course I WILL EXTEND my Live trading account. I don’t usually “rushed” into a decision as I like to sturdy and know all the odds before execution…like any contract project work, I would surmise. We have to be responsible for our decisions and, of course, the consequences.
    This is main reason why Forex Trading fascinate me so much as I look at it like a business where my only competitor is myself and my decision….and most certainly a reliable and trust worthy Broker too.

    Thanks for spending time in answering my Newbie’s questions yah!....and LOL, back reading my 4-5 months old postings made me realized (and embarrassed) just how “green” I really was back there. But I think I am getting there!

    As usual, thank you and all at FPA for all advises, directives, and, yes, great patience with my novice attitude.

    P/S: As a matter of fact, many of my immediate family members are, and still are, practicing Buddhist : )
  10. SilverOne

    SilverOne Private

    Jun 10, 2011
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    I think that in first time of trading you have the feeling that you know the market and you can make the money like you can do nothing, so it is big mistake - because if you want to trade good you have to have a lot og knowledges about forex which come only after time with your experience!

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