Ask an expert, and he would probably give you a technical explanation, as “most forex traders are unsuccessful because they are undercapitalized compared to the size of their trades. Then they would add a reference to greed and being more interested in making a lot of money, which leads them to make bad decisions.
But what does this mean in practice? Well, what it doesn’t really mean, but it is often the explanation you see on the internet (usually by people who lost money in forex), is that there is embezzlement, that the broker was not honest and others in the same style.
Now, it is clear that there are unscrupulous people in forex as in any other business, but that does not explain why most of those who try to reach their goals do not succeed.
The real reason why most forex traders fail
Well, we started with the “greed” problem. When trading forex, there is the option to trade with margin. This means borrowing money to invest in the market. While this helps you earn more with shorter movements in the currency, it also means that you can lose a lot more as well.
The greed factor is when people focus too much on how much they could earn; and forget to take into account the risks they are taking. Depending on your broker, you may be able to trade hundreds of thousands of dollars with a deposit close to a thousand dollars. You would think that being in charge of a lot of money would make people more cautious, but it doesn’t.
The need for utility
Then we come to “undercapitalization”: often beginners are motivated to earn a lot of money, and dream of mansions on the beach and driving Ferraris. They think that by placing a few thousand, they could earn millions. Therefore, it is not the undercapitalization itself, but exaggerated expectations.
Undercapitalization means that there is not enough money (capital) to achieve the objectives. But if you have a more realistic perspective on how much you can earn with forex, then with the same level of money, you can have a reasonable capitalization.
There is always a risk
What happens is that many traders are too motivated to make a lot of money and ignore the risks. To spend money in the hope of obtaining more exchange without calculating or changing the risk is to define, not to invest. In the long run, those who bet don’t win.
Have you ever asked why casinos always win, and those who go to casinos always lose? Because the casino is an investor, while those who go to the casino are a gambler.
And as a large majority of those who lose in forex are not risk assessors, many experts draw a simple conclusion that success is due to learning risk management.
As far as we can see, finding deals on who you think can win is relatively easy compared to learning how to avoid unnecessary losses.
Basically, most people lose with forex trading because they focus on how much to earn, but not enough to ensure that they actually win.