Forex trading has reached the 5 billion dollar milestone in online transactions. Every year millions of investors are joining this marketplace. Forex is a profitable trading arena if trades are conducted effectively but every year hundreds of investors lose money because of a lack of understanding. There are a few common reasons people lose money in FX trading. Today, we will discuss these reasons.
1. Overtrading
Beginners can become absorbed in overtrading when the marketplace is very new to them. But overtrading drains their money and they face loss gradually. A time comes when they have nothing left to invest and their account balance becomes zero.
To get away from this bad habit, newbies must execute their trades based on the longer timeframe. If they are new to the FX market, they should not do scalping which may attract them. Overtrading is closely related to scalping and it is not recommended for new investors.
Experts know all the ins and outs of the Forex platform and for this reason, sometimes, they do scalping to analyze the market. They can earn money using scalping as they suit them. Gathering enough experience, investors know can take the taste of scalping and overtrading. Newbies should not overtrade and execute trades at regular intervals.
2. Risk management ratio
Risk management ratio plays a huge role in future risk management in trading. An ideal risk to reward ratio is regarded as 1:3, which indicates that if our investment is $3 we can take only a$1 risk. Experts estimate their risk before rushing to buy financial instruments that help them to conduct a secured business. See here and learn more about the importance risk assessment factors. This will definitely help you to take better trades at the most complex states of the market. Never try trading with negative risk to reward ratio as it will make things worse.
An ideal risk to reward ratio must be maintained for avoiding the loss. FX is an uncertain market and trends change occasionally. Without understanding the trend, beginners often make a whimsical decision but if they are careful of the risk management, they can make their trading securely with calmness.
3. Stop-loss order
Most of the investors use the technical option of that order but some of them neglect this option which makes them suffer later. This order is a technical option that helps investors to close their trades automatically. Using this option the UK trader can set a stop loss point and when the moving average will touch that point, the trade will be closed by the system to save it from facing more loss. Not setting up this point is regarded as one of the most common reasons to lose money in Forex trading.
4. Take profit order
The take profit order also helps you protect the trading account from the potential loss but in this case, the investor will set a take profit point which will help to close the trade automatically. When a certain amount of profit will be achieved, the system will close the trade and save the account from the consequences of a downtrend.
Despite its good sides, some of the traders are very reluctant to set a take profit point due to their greed and thus can face a huge loss which could be avoided easily. One thing we should remember is that that take profit point should be placed near to moving average and not so far above them. This is because taking a bigger lot may be the reason for a double loss.
At the bottom line, it can be ensured that if these reasons are understood properly, we may avoid potential losses which may reduce your profit margin. Experts suggest investors find the reasons for their mistakes at first as this may be helpful in the future.