What leads to loss of money in Forex trade and How to Avoid Them in 2021?

loss of money in Forex trade

Forex market is the largest trading market globally; traders worldwide invest in the market to earn. The market trades in international currencies that are bought and sold for profit. As the trade is in currencies, it makes the market highly liquid but with the same level of risks. Therefore, traders cannot survive in forex trade without good management techniques and strategies. 

Beginners or professionals all have to use these techniques for generating profits. Trading is not an easy task; it requires experience, knowledge and understanding of the market and its instruments. Even pros of the trade sometimes have to face loss of money in forex trade due to the uncertainties. The volatility is the source of income and loss both. 

Therefore, traders should be prepared to manage risks and avoid them by paying attention to the factors. There are several factors that impact forex trade. Analysing them would be highly beneficial, as traders would be able to plan and make strategies before going live in the market. 

What is the Forex Market?

The forex market is quite big and wide and involves traders and investors such as banks, corporates, financial institutions and individuals to trade in the market. The market traders buy and sell the currency pairs for hedging and speculating. The foreign exchange market exchanges currencies of various countries and operates twenty-four hours a day. 

The market daily makes transactions worth trillions of dollars with traders in various countries. The exchange of currencies provides high returns with high risks. A trader can start trade in the forex market with $100 as the initial deposit and hold a high position with the leverage facility. 

Moreover, forex market traders have the option to trade through over-the-counter manners or via the interbank market. Over-the-counter traders can invest in the forex market individually or through brokers. In contrast, interbank market trading allows the banks to trade in currencies for hedging, balance sheet adjustments and trade on behalf of their clients. 

Using a network of computers, the trade is operated online, connecting all the traders and brokers. 

A 24 hours and 5 days a week trading market does not close overnight and provides traders with potential opportunities. However, the forex market requires efficiency and experience for trading.  Detailed Forex Trading Guide

Why Traders Face Loss of Money in Forex trade?

Forex traders use a variety of techniques and strategies to trade in the forex market. The automated tools, charts, patterns, indicators, trading platforms, fundamental and technical analysis, expert advisors and many such trading tools are used by forex traders; still, they face loss of money in Forex trade. Moreover, the legendary and pro traders who have traded for years have encountered high losses in the forex market. 

When the losses incurred are analysed, traders know that many factors impact the trade. For example, it may be a poor decision, emotional outburst, peer pressure, bad terminals etc. 

Below discussed are some of the reasons that impact the trade and lead to losses: 

Risk Management

Risk management is the first point that comes to mind when thinking of failure in forex trade. If the trader has not conceptualised an adequate risk management technique, there are high chances of facing loss in trade. Even a trader with professional trade experience can be out of the trade with a bad risk management policy. 

In the long run, traders have to formulate proper management techniques, prioritise their trade and protect profits. Traders have many options to protect their profits, such as the stop-loss order, take-profit order, etc. could be used to minimise the risk of loss. However, without good risk management, no trade could be fruitful. 

Psychological Factors

Control of emotions is the first thing a trader should do; if they cannot manage the psychological factors, they would lose money in the forex trade. Fear, greed, anger, excitement, jealousy and overconfidence are signs of emotions that traders cannot control once they have earned or had the quest to earn more. The forex market is highly erratic; if the traders hold a position for long and feel that they will exit before the change, they must be alert. If they skip the move overconfidence, they may lose all the profits earned with the initial investment. Nothing could be done at the last movement due to the market movements, thus making it risky for traders. 

When traders face loss, they have a set thinking that they might incur more loss, that is, the fear of losing the money. But, this is not the correct option; traders have to be patient in trade and wait for the opportunity to earn. 

Tops and Bottoms

Trading is risky, and when new traders invest in the market, they hardly analyse and just go with the top trends. The decision is not calculated and aggressive, which could be harmful. Traders add on to wrong trades, and they feel that there will be a turning point after a low or high, and they invest. The traders get exposed to risk and, in return, lose money. Similarly, traders check on the downtrend and go for a bottom investment; this could be a wrong decision. 

Traders with experience and knowledge can only pull it off with their skills in the forex trade. Therefore, a hardworking trader with experience in trade would make better decisions than an aggressive trader or novice trader. 

Lack of tested strategies

Most traders of the forex market just go live with the strategies and plans they have made. However, the hurry or overconfidence in the strategy turns out to be the factor behind the loss of money. Therefore, traders should analyse the market, create strategies and plans and test them for a while before going live. 

For the test purpose, they can use practice accounts provided by traders or use another method to avoid such situations. For example, a currency pair is in an uptrend for quite some time and then faces a downtrend; in such a condition, the trader should follow a simple trend-following strategy to earn a good profit. 

Similarly, traders should analyse, test and then use the strategy before investing. Otherwise, they may face huge losses. Therefore, traders have to be patient and calm while trading in the forex market. 

Risk – reward ratio

The forex market always provides traders with some opportunities to earn profits. The major trade currencies and the currency pairs are available for trade. Although, traders should not invest without analysing the risk-reward ratio. Traders should check on the market trend and decide on that basis; if they feel that the currency pair is beneath the resistance level, they should avoid entering the market. It would be feasible if they entered the trade after the resistance level breaks. Similarly, support levels should also be checked before entering or exiting any trade. 

A trader should prioritise the risk-reward ratio for better trade and high returns in the forex market. 

Leverage

The brokers of the forex market offer various leverage ratios to their clients for high trade positions. However, traders should utilise the leverage ratios properly. As higher the leverage ratio is used, the risk is also increased. A trader has to face the loss on the same level with which they enter the position in the market. The initial investment is not considered in such a trade. 

Therefore, traders should prefer low leverage and should not misuse it. On the other hand, when traders are sure of high returns, they only should prefer using a high leverage ratio. 

Stop-loss

Applying stop-loss level in the execution of trade is profitable, but many traders do not know its use. They are not able to analyse the market and set the stop-loss level for avoiding unnecessary loss. Traders should use this smart technology of forex trade to secure the trade. But, traders are not aware of the adequate use of this technology. 

With practice and experience, traders can learn to use the stop-loss order and set the limits. 

Updates

Economic developments are an integral part of the forex trade; the market is affected by economic developments, political changes or any other social change that relates to a nation or world. Unfortunately, many traders are not updated about the economic conditions and changes; this negligence is the reason behind the loss of money. 

Traders have to do detailed homework on the forex market and its factors before going live with a long and short position. Thus, traders should study the trade’s technical, fundamental, and other aspects before trading in the forex market. If not done so, it could lead to a massive loss. 

Blind Trades

Forex market trade should be invested in with proper study and analysis, not based on someone’s recommendation to go live and invest. But, on the other hand, traders should not go blind; they should inquire about the reputation of the trader and the past trade experience before taking their suggestion. 

But, mostly, traders listen to friends or relatives or other unqualified individuals with no trade knowledge and experience. This is the reason behind incurring a loss of money on a currency trade. 

How to avoid Loss of Money in Forex Trade?

Forex market is the largest trading market with 24 hours a day trade attracting lots of traders to earn profits. The market is accessible the world over and offers facilities of an exchange, leverage ratio, marginal rate, swipe discount, trading platforms and best online brokers to assist traders. An investor has to pay low commission and fees while trading online and benefit from technological equipment to access the trade anywhere from the devices globally.

To trade in the forex market, traders have to gain experience and sharpen their skills for better opportunities and high returns. But, with all this comes the risk of trade which leads to loss of money. However, traders can avoid such situations by following certain guidelines. 

Here, we have mentioned and discussed the areas that could be looked after to avoid losing money: 

Interpreting Forex News

Forex market is a trade that concerns currencies of different countries, so to invest in the currency, traders have to analyse the factors that impact them. One of the significant factors of forex trade is news. Most of the big markets take new shifts or move due to the news of the hour.

With technical analysis, traders also have to concentrate on fundamental analysis. Traders who have gained experience focus more on technical aspects that are price fluctuations. But for beginners, it is advisable to focus on both factors. 

News interpretation should be correct as this could lead to the right decisions and investments. Therefore, traders should know about the happenings that impact the trade. The knowledge and interpretation of news would help traders avoid money loss. 

Plans

Traders who invest their money always have some set goal to achieve, which is only possible with a plan in mind. Without a plan, traders won’t be able to earn the money they desire. So, having a set plan is a necessity of any trade to avoid loss. 

Leverage 

Having a watch over the leverage used is another important thing traders should focus on. Traders prefer having a high position in the market, and to achieve that, they use high leverage ratios. This could be a call for high risk when traders get carried away in their excitement. 

A high leverage ratio brings with it increased risk; to manage the risk, traders should use the leverage appropriately and avoid unnecessary losses. 

Overtrade or Undertrade

A trader who overtrades is full of excitement and anxiety, which leads traders into high trade. Overtrading is a sign of an emotional trader, and such a trader can never succeed in forex trade. Control over emotions is a must for trade and practical decisions. 

Traders also have fear, which stops them from investing; thus, traders don’t prefer trading much. This is also a sign of loss, as traders won’t have the proper knowledge to invest in the forex market. 

Therefore, to avoid losing money, traders should be regular and practical with their investments. 

Conclusion

Forex trade is not easy; it requires research, education, and experience to earn desired profits. Sometimes even professional traders also face the loss due to the uncertainty of the market or other factors. To manage such conditions and trade, investors should keep in mind the above-discussed points. 

How traders can avoid loss of money in Forex trade and what factors make traders lose money. Both are essential to be understood and become a successful trader. Traders can even take the help of reputed brokers available online such as 101investing, to access the trading platforms and tools. A trader should have a plan and strategy before going live, and for that, they require trading tools, and they can earn profits with the services and experiences gained. 

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