Forex is a business which can make a trader some good money and make the beneficial trader very happy. It can also be a nasty affair if the trader has to endure an unending stream of losses, and anyone who has worn this shoe can tell you straightaway that it is not fun to keep seeing the account balance continually depleted.
The internet is filled with articles that aim to tell you how to make money in forex. We will tow a different line. What we shall do in this article is to play out exactly how traders can easily lose money in forex. Forgive the pun; it is just hoped that by showing some of the silly mistakes that end up leading to losses, the traders who read this can do just the opposite; avoid them and start making money.
How to Lose Money in Forex: Deprive Yourself of Sleep in Order to Trade
I’ll use myself as an example from those early days when I was young and dumb. I had gone out the whole day and came back home to see some crazy action on the charts. On every single chart I pulled up, the USD was showing some unbelievable strength. I searched around the market information sites and discovered that some major event was fueling some serious US Dollar buys. I decided to get in on the action during the next market session, which unfortunately meant I had to sacrifice my sleep. After staying awake the whole night and tripling my account (no kidding; some high risk positions paid off for me big time), I decided to continue from where I left off the previous night after just an hour of sleep.
Whoever says sleep deprivation is not a bad thing has either not suffered from its effects or has never denied himself some reasonable sleep. I cannot tell what happened. I must have dozed off on my laptop when the markets began to move once more, and accidentally clicked a Buy button instead of Sell, which triggered a long position on the EUR/USD. Without a stop loss protection, the renewed US Dollar strength not only wiped off all my previous gains, but depleted my forex account in its thousands to just under $300. Needless to say that when I awoke, what I saw was enough to make me depressed for days on end.
If you think my personal experience years back was a one-off incident, just do an internet search and you will be shocked to discover that this is a story that is replicated all over the place; costly mistakes being caused by sleep deprivation. Only recently, a banker in a European bank slept off on his workstation and his fallen head ended up crediting a customer with billions of Euros. Thank goodness the error was discovered and corrected. In forex, there are no second chances and if you are a victim of a mistake induced by sleep deprivation, you are on your own.
How to Lose Money in Forex: Using Hundreds to Chase Thousands
When you have sales pages all over the internet showing smiling ladies and men holding wafts of foreign currency in their hands and you are hit with the bold headline of how some system transformed hundreds of dollars into tens of thousands of dollars in a few weeks, then it is not a mystery to see many traders being lured into such snares.
Unless the trader has some kind of magic wand that is able to transform high risk trades into persistent winners, pumping out tens of thousands of dollars like an ATM machine from just a few hundred dollars is impossible to achieve. Excessive risk may work for some time, but when a string of losses hits, the effects can be utterly devastating. There is no way that a trader can win consistently on excessive risk. Trying to turn $500 into $50,000 in a matter of days is always a recipe for disaster. If Goldman Sachs with all the veteran traders strategically positioned at various levels could lose $2 billion in excessively leveraged trades, then what is the guarantee that a retail trader with very little market experience will indeed succeed where the big dogs have occasionally stumbled?
It all boils down to the element of risk. Risk well managed will give good results. Risk poorly managed or used carelessly with reckless abandon will hit you very badly. It has hit the big guys too. It collapsed the oldest bank in the UK (Barings Bank). It affected the balance sheets of Goldman Sachs, Societe Generale and UBS. But the difference is, these three banks are big and absorbed the losses. For a retail trader, it could mean the end.
How to Lose Money in Forex: Trading with Money You Can’t Afford to Lose
The risk disclosure warning is a requirement by regulators on all brokers. If you go to any home page of a broker’s website, the warning is clearly written: never trade with money you cannot afford to lose. Many retail traders simply choose to ignore this warning, or they think it is just there for fun. Now let us see why there is a difference between money that a trader “can afford to lose” or “cannot afford to lose”.
It is all about emotional attachment. Forex trading is a highly psychological event. Trading with money that you cannot afford to lose brings with it a stronger emotional attachment, which will interfere with the ability to make rational trading decisions. Take for instance a situation where a trading account with active positions is suffering some draw-downs. Traders who stick with their successful strategies know that draw-downs are a part of the market, especially as no one trader can determine with 100% certainty where an asset has bottomed out for a long position, or where it has topped out for a short position. Some degree of market movement against a trade position before it turns profitable is to be expected. Traders who use money they cannot afford to lose always end up getting panicky when this happens, and have a greater tendency to cut the trade in a loss position to “preserve capital”.
No prizes are awarded for closing trades in losses to protect against further losses. Do this 10 times, 15 times and see what happens. The account will surely be depleted. When you trade with money you can afford to lose, less emotion is placed on trades and it is usually possible to allow a trade in a draw-down to eventually perform to expectations. I have seen this several times. There are trades I get into which experience draw-downs but eventually become winners. Being able to position trades in such a way that draw-downs are reduced to the barest minimum is something that can only come with trading experience. So next time you see your broker’s risk disclosure warning, do not ignore it. It is for real. Trading with money you cannot afford to lose induces pressure, and trading under pressure will lead to more losses than gains.
How to Lose Money in Forex: Exclusively Learning Forex with Weekend Seminars
This is a big problem in many countries where retail forex trading made a late entry. Many self-appointed forex gurus have been making huge money by offering weekend forex classes. I know one who made so much money from his $200-a-seat forex seminars, he was able to build a tastefully constructed private school. Another fellow known to me also made $50,000 in a single seminar, eventually going into the solar electricity business. Good money for these “gurus”, but what were the traders left with? Many had bad stories to tell.
It is hard to understand why people who want to learn about the forex market which runs basically from 2100 hrs GMT Sunday night to 2100 hrs GMT Friday night choose to attend weekend forex seminars when the markets are closed and platforms are not working. How are practical demonstrations done?
With such a faulty foundation, how do traders who learned the ropes in such manner ever hope to last a month in the dynamic markets ruled by central banks and institutional level players, some with more than 30 years professional experience? Well, they usually don’t and it is not long before the margin calls start coming thick and fast.
How to Lose Money in Forex: Over-leveraging and Over-trading
Over-leveraging means use of excessively high leverage. If the trader is winning, then this is good. But the drawback is one or two losses can counter the effects of 6 winning trades on an over-leveraged account.
Over trading means holding too many positions open at the same time, or placing trades so soon after each other, especially when previous ones have been in a loss position. It is much harder to keep tabs on up to 5 positions, all doing different things on the platform. How can the trader make money with such divided attention? It is usually better to handle just one or two positions than to handle so many at once.
If you want to change your negative forex trading story this year, then do just the opposite of what has been written above. But if you don’t mind doling out your hard earned money for others to reap from, then keep doing these things.