Forex Blog @ FxBees.com

As you probably know, Forex trading is perceived as a dangerous business, where up to 90% of all traders burn their money. But why? The stock market has the same unpredictable moves, but investors are not in danger to burn their account immediately.  So why in Forex?

Operating a Social Forex Network, we do have access to all trading activities of all our members. This gives us the opportunity to analyze, why and how traders fail. Even though we also have a lot of demo traders in our network, we focused our analysis on real-money traders, to provide a realistic picture.

So what is it? Do traders take too big positions sometimes? Happens to some, but its not the major reason. Do they trade exotic currency pairs without knowing them well? New traders are curious about everything and some also suffered losses because of that. But again, not the majority. Our findings revealed that traders fail because of two very simple reasons, which are known quite well, but apparently too much often still disregarded.  So no surprise, but yet another proof about what has to change.

Mistake No. I - Constant Overleverage:   As almost every book about money management stresses out: Do not risk more than 2% of your account in a single trade! How does that fit together with broker offers, allowing you to trade with as little as 25 Dollars? Even if you want to risk 50 pips on a micro lot (1,000 USD), you are still risking 5 Dollars.  So even for a micro account, you should have at least abou $500 in your account, to feel comfortable with your trades.  However many brokers dont allow you to have a micro account with $500 or more. As a result beginners are forced to take too high risks on a constant base.  So isnt that ironic? Particulary beginners, who should be even more cautious, are forced to take too much risk! They do, they fail and then add new flavor to the story of dangerous forex gambling.

Mistake No. 2 – no stops: No stops? Sounds too easy, right? This is what you are going to learn in trader’s primary school! But its still true: While taking profits quickly, especially beginners are very loose on their losses and often close positions with -100 pips or even higher losses.

So at the bottom line, there is still no basic understanding about money management risk/reward ratios, etc.  As Yohay alreade noted: Before Forex becomes eventually more mainstream, this has to change. Its up to the brokers to take responsibility and not to overleverage new clients and its up to websites like us, to educate people about the essentials of Forex trading.

We have to admit: Money Management is not the most sexiest part of Forex trading, but losing money isnt either. So we will start to write more about that in our future blog posts.

Tags: beginners, fail, Forex Trading, leverage, money management

This entry was posted on Thursday, August 12th, 2010 at %I:%M %p and is filed under Forex Trading. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.