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Why Traders Lose Money: Avoid a Common Pitfall

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Published: 26Jul2009
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I am writing this article because I am tired of seeing estimates that 80% (some have it as high as 95%) of retail traders in the forex market lose money. I have no idea what the proper percentage is for this forex trading estimate but I do know that some of it can be avoided if a new trader (“newbie”) can avoid some of the pitfalls that plague those just entering the market. The purpose of this article is not to give a lesson in proper money management but to raise awareness of its importance.

As webmaster (and co-founder) of a leading forex discussion site and someone who has traded the forex market for over 30 years, I have seen not only “newbie” type traders but experienced traders blow their accounts. It is very frustrating to see traders lose all their trading capital due to a lack of proper risk management that could have been avoided. This does not mean these traders would be successful otherwise but at least they would have had a chance. The culprit is often the failure to employ proper money management, which is characterized by a combination of too high leverage, lack of or improper stops, doubling or tripling up a loser and hope replacing sound analysis once a position went against them.

Many newbie traders come into this market never having traded with leverage. They see promotions of trading with 100:1, 200:1 and even 400:1. They see the lure of quick profits using high leverage. They trade a demo account and everything looks easy. Then they open a real account and find it is a lot different than “paper” trading. Leverage works great when a position goes your way as it magnifies your profits. On the other side, it can be devastating to one’s (limited) capital if proper risk management is not employed. As an example, using 400:1 leverage, a eur/usd position only has to move Ľ% (.0035 or 35 pips) to see the account wiped out.

During this current global financial crisis, financial firms with billions of dollars of capital have been wiped out by over leveraging and lack of proper risk management controls. You are probably asking, so what chance does a “newbie” trader have in this market? The answer is you can control your own risk parameters. You can follow proper money management principles.

The following is from an article in the “Tips from the Pros” section of the Learning Center on www.global-view.com, which along with its forex forum and other resources, is a good to visit to learn about all aspects of forex trading, including proper money management and ask questions about any subject.

Jay Meisler, a partner in Global-View.com, says one problem of trading with too-high leverage is that one piece of surprise news can wipe out one’s capital. “Those who treat forex trading as if they were in a casino will see the same long-term results as when they go to Las Vegas, he says adding: “If you treat forex trading like a business, including proper money management, you have a better chance of success.” Newsweek International, March 15, 2004

Think about it. If you were running a business would you risk the entire firm’s capital on one roll of the dice? Trading is your business. Treat it as such. Employ proper money management. Don’t succumb to the lure of excessive leverage, which is “fool’s gold.” Live to trade another day.

I cannot emphasize this enough.

Jay Meisler is a co-founder of Global-View.com, the leading forex discussion site for more than a decade and where traders from around the globe come for the latest breaking news, flows, rumors and trading ideas => http://www.global-view.com

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