Why Forex Traders Fail

Why Forex Traders Fail

by Joerg Hausmann

Amazingly enough according to estimates, 90 percent of Forex traders lose money. Futures traders fare a little better, 70 to 80 percent are losing traders. Another fact is that the Forex traders lose their trading capital in record time, 6 months, compared to Futures traders at about 12 months. To put all this in perspective I will do a comparison with small business start-ups and how they cope with failure. Further I will also look at the reasons traders and businesses fail. For those of you that think this comparison is not relevant, think again. Why is Forex trading different from any other business? The motive is to make money, right? Otherwise, it would be no different from roulette or any other game that can be found in Las Vegas or Macau.

According to the article, Survival and Longevity in the Business Employment Dynamics Data, (Monthly Labor Review 2005) Amy Knaup shows that about 60 percent of business establishments that opened in second quarter of 1998 were still in existence 24 months later. In other words, only 40 percent of new businesses failed within 24 months, that is much better than any traders can show. So why is it that business and traders fail and are there any similarities. Let's have a look at another 2005 study Small businesses: Causes of bankruptcy by Don B. Bradley III and Chris Cowdery from the University of Central Arkansas. In this study, they authors elaborate that roughly 90 percent of the business failure is due to poor management caused by a lack of knowledge. So what kind of knowledge are business owners lacking? The areas where knowledge is lacking are many but the following are the most common:

1.Bad management practices
2.Poor choice of location
3.Failure to invest in new products and efficient technology
4.Lack of adequate financing.

In some ways Forex trading is more straight-forward than starting a business (no incorporation, no sales or marketing etc), but on the other hand it is also more complex and illogical since we are dealing with human consensus and expectations driving exchange rates up and down seemingly at random. Going through the above four reasons for business failure and translating it into the Forex trading equivalent we get:

1.Bad profit and risk management
2.Poor choice of Forex broker
3.Failure to invest in a proper trading and charting platform
4.Under-capitalized

But for a Forex trader it usually doesn't stop here. Most people signing up for a Forex broker account do so without much knowledge about the Forex market and the psychology involved. On my website I have created a free Forex trading course that addresses the deficiencies that lead to failure of Forex traders. In order to make it easier for traders to grasp the difficulties, I developed the Three Pillars to Profit:

-The Right Trading System, i.e a validated Trading System that produces consistent profits
-The Right Psychology, i.e a Psychology that supports your trading effort towards consistent profits
-The Right Experience, i.e an Experience that promotes confidence in your Trading System

This probably seems obvious but believe me, it isn't. Contrary to what all Forex Brokers want us to believe, Forex trading is not easy.

We have established that Forex traders and Business owners face pretty much the same problems, but why is it that Forex traders fail to such an astounding degree compared to business owners. The Three Pillars to Profit I think explains it all, because most traders that enter the Forex arena are severely lacking in all the three pillars. Would you start a Supermarket if you had only 1 or 2 weeks of experience as a Supermarket clerk? Would you start a business without having any idea about how to generate sales or market your products? If you answered "No" then you are smart, but this is exactly how many aspiring Forex traders approach their new venture. They don't have a clue of what they are doing.