Why forex traders tend to lose money
About Ramki Ramakrishnan
Ramki Ramakrishnan is an Elliott Wave specialist whose work is respected by many of the world’s best traders. He is an international banker and treasury manager with over 30 years experience, most of which has been directly associated with the financial markets. Ramki’s unique perspective on the markets and his penchant for identifying low-risk trades are what draws people to his blog at wavetimes.com.
Ramki has also written a book “Five Waves to Financial Freedom” which is fast becoming the new reference book on the subject of Elliott Waves, given it’s easy to understand style, and richly illustrated content from recent market movements.
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Stocks, ETFs, Options,Commodities, International,Funds, Currency, Bonds
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By Ramki Ramakrishnan
Let's face it. Most forex traders tend to lose money. Yet, these are smart people. They are confident people. They know the risks involved and most traders do a bit of homework. Despite this, only a few traders are able to avoid losses. What could we be doing wrong?
First of all, a majority of us like to daytrade. This is not a bad thing in itself. We all know that the forex market is a place which presents plenty of opportunities, so if we sit aside for a long time, we could miss some of them. But the trouble with us is we are often chasing the market, instead of letting it come to us. What I mean is we have a tendency to jump into a trade a bit too late, when we are convinced that about the direction. This often means our stop-loss level is farther than where we would really like it to be.
Second, we are often influenced by the heat of the moment, the excitement of an unfolding move, and the anxiety that we will miss a trade that looks like a sure winner.
Third, many of us have only a limited understanding of technicals. Sure, we have all heard of the various approaches to technical analysis of the forex market, for example, the Elliott Wave Principle. (By the way, I count myself as one of a more experienced Elliott Wave Traders around, and I too make some of the above mistakes every now and then. We are all human, after all.)
Let us take the EURUSD for example. In the recent days, this currency pair has been trading in a very choppy fashion. My first chart showing the Elliott Wave counts appears here in WaveTimes , my other blog that deals with using Elliott Waves to give ourself an edge. You can see that any trader who got in a bit late during a move would have become minced meat. The reason is simple. We are in the middle of what is known as a complex correction in Elliott Wave circles.
During a complex correction, the currency will trace out patterns that are unpredictable. Just when you are convinced of a certain direction, everything will change.
How can we know in advance when a complex correction is under way? This is where knowledge of Elliott Waves will help. There is a guideline that says that in a five-wave move, we will see corrections alternate in complexity. Thus, if the second wave was simple, the fourth wave will be complex. Most of the time, the fourth wave will be the complex correction because it comes after a third wave that travels far and quickly. If you are interested in learning more about Elliott Waves, do check out my book "Five Waves to Financial Freedom". The link is on the left of this article.
My suggestion to traders is when you spot a complex correction, you should stay on the sidelines until you spot a good resistance level in the next higher-period chart. I invite you to view the next Elliott Wave chart of the EURUSD here . As you can see, there is a key Fibonacci retracement level at 1.2596. If you are a low-risk trader, then you might be better off waiting for a recovery to near this resistance and sell there.
Of course, there are no guarantees that it will work. However, being careful to sidestep most of the complex moves gives you the wherewithal to take this risk. Trading is all about timing your entry carefully. This is how trading is different from investing. As forex traders, we really must learn to choose our battles carefully.
Good luck.