I've figured out why so many people lose money in Forex | Forex Factory

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I've figured out why so many people lose money in Forex

  • #1
  • First Post: Edited Feb 23, 2015 2:53am Feb 20, 2015 7:18pm | Edited Feb 23, 2015 2:53am
I think I've figured out why so many people lose money in Forex. I think that there are three main factors involved.
They would be commissions, leverage, and volatility.

The first factor is commissions. If a commission is 0.2, on 10k that's just 20 cents. Not bad, right? Wrong. You'll obviously need to close the trade so that's 0.4 pips roundtrip. Then if leverage is involved, such as 20x. You're paying commissions on 20x your money which means 20x the cost. So that 40 cents roundtrip just turned into 8 dollars per round trip trade, or 0.08% of equity. After just 12 trades, you've already lost 1%. 120 Trades and you've lost 10% of your account.

The next factor is leverage. I think that my calculator proves that it's near impossible to survive more than 3,000 trades with stop gain/loss of 50 pips and 1:20 leverage. Due to randomness in the Forex market, an account is very likely to suffer a string of bad loses resulting either in a very highly leveraged position to make back what is lost or a lower leveraged position but with more pips needed to make back what is lost.

For example, if you start off with $10,000 with 20x leverage and a trade goes against you by 250 pips, you've now got $5,000 left and you're now at 40x leverage. If you went back to 20x leverage, you'd have to make 500 pips just to get back to $10,000. Leverage causes Gambler's Ruin to occur much more severely.

The last would be volatility. How much your account will go up or down on a trade. A stop loss/gain or deleveraging will lower volatility which counteracts the Gambler's Ruin being caused by high leverage.

The best strategy seems to be decreasing leverage and increasing volatility per trade. So don't do anything less than 40 pips, trade more than 5:1 leverage, or not deleverage. The best theoretical ROI is probably 1x leverage and a long term position with no stop loss/gain since it minimizes losses from commissions and leverage.
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  • #2
  • Feb 21, 2015 4:56am Feb 21, 2015 4:56am
Sorry for my ignorance , but does commission include the spread ? or it's fixed % on the profit you make ??
  • #3
  • Feb 21, 2015 5:03am Feb 21, 2015 5:03am
Hello. By your analysis, should I conclude you have not made a Forex trade yet?

It seems to me that commission is commission, and is not applied against the leverage, but against position size. At least that is how my commission is calculated. $X times number of lots.

It seems to me you are analyzing position trades of equities with Forex. Why would anyone have a stop of 250 pips? That is ridiculous.

Volatility is your best friend. Without it, the market is flat and you make nothing. You reference volatility of your account balance. ?HUH?

I am sorry to say, but you did a lot of work for nothing and are all worried about nothing. Your scenario is pretty far-fetched in my opinion. Forex is not really that great for buy and hold strategies. It is awesome for intra day trading though. Forex is not good for long term charts. You can make a fortune on short term charts though.

Recommend you go back to the drawing board and forget about this analysis. It is not accurate.

By the way, the main reason people lose is emotional response. Once real money is used in the market, your anxiety level increases. If it is not controlled, the result is panic mode which causes rational thought to stop. Think of someone who is afraid of swimming and panics in 4 feet of water. Rather than merely standing up, they drown. In essence, volatility is actual responsible for this, but it is also the trader. Market makers realize most people stare at the candles, so they cause them to jump all over the place to enhance your emotional response. This is why successful line traders use profit targets and stop losses so they can ignore the charts after a trade is placed. This is why successful indicator traders use crossovers so they can ignore the action of individual candles and trade on a larger sample size of the market. However, it is a learned skill. Until you learn to do it, you will most likely fail because the "motion of the ocean" is purposely designed to make you fail. You will have no choice really, because your emotional response will cancel out your rational response. You will feel like you are drowning, even though you are actually quite safe.

Everyone must experience it. Those who overcome it increase their probability of success. Being unable to control your emotional responses is the reason most traders fail. Of course, half-ass systems are a culprit of emotional responses too. Between fooling yourself, and the market fooling you at the same time, your emotions go into hyper-drive and make it nearly impossible to think clearly.

Now you know the enemy. It is a chemical reaction in your body. You cannot stop it, but you can avoid feeding it. Good Luck
You cannot be extraordinary by being normal
  • #4
  • Feb 21, 2015 6:17am Feb 21, 2015 6:17am
Dkrock not every participant in the market trades intraday. For some long term traders 100 pips is just noise. There are plenty who trade the daily charts and use hundreds of pips as stop loss. It might sound a lot to some but anyone can risk 1% of their capital with 300 pips just like scalpers can risk 1% with 30 pips.
  • #5
  • Feb 21, 2015 6:49am Feb 21, 2015 6:49am
Quoting dkrock
By the way, the main reason people lose is emotional response. Once real money is used in the market, your anxiety level increases. If it is not controlled, the result is panic mode which causes rational thought to stop. Think of someone who is afraid of swimming and panics in 4 feet of water. Rather than merely standing up, they drown. .... However,it is a learned skill. Until you learn to do it, you will most likely fail .... Being unable to control your emotional responses is the reason most traders fail. Of...
Ghost Rider - WWTBMD?
  • #6
  • Feb 21, 2015 7:08am Feb 21, 2015 7:08am
Emotional response might be one big problem, but take that away and go to a casino and you won't achieve much in the long run because the odds are against you. Same with forex, unless you manage to have a mathematical edge your chances of making money in the long run are slim regardless of how good your money management, discipline and emotional control are.

Because spreads and comission are part of the "house edge", theoretically it could be that trading on larger time frames with bigger sl and tp reduces the house edge and increases the chances of developing your own edge.
  • #7
  • Feb 21, 2015 7:42am Feb 21, 2015 7:42am
Quoting redgreen
Emotional response might be one big problem, but take that away and go to a casino and you won't achieve much in the long run because the odds are against you. Same with forex, unless you manage to have a mathematical edge your chances of making money in the long run are slim regardless of how good your money management, discipline and emotional control are. Because spreads and comission are part of the "house edge", theoretically it could be that trading on larger time frames with bigger sl and tp reduces the house edge and increases the...
Simply not true. If it were, then how do you explain those who make a living from trading? Are they just "luckier" than those who can't? Nope.

Your whole post comes from a gamblers mindset. "house odds" "mathematical edge" these are the fears and tools of a gambler. Successfully trading the markets (any kind) has no place for "luck" or random chance like a casino. Is emotion control the only factor? Of course not. There are many things to learn about trading and the only way there is to spend the time and do the work learning how to read the information on a chart. It's all there. When you find it ... you'll know.

But that's the key. YOU have to find it. Nobody can show it to you. Sure you can be shown the "mechanics" of it but until that makes sense for YOU individually, it won't help much. By the time you become consistently profitable trading, you'll have learned more about yourself than you ever realized was there, and more about the markets than you really need to know.

There are no shortcuts to this process and the time it takes is directly proportional to the individual traveling the path.

First thing to learn? Trading is NOT gambling. Until a person can see that there's little hope of success.
Ghost Rider - WWTBMD?
  • #8
  • Feb 21, 2015 9:20am Feb 21, 2015 9:20am
Quoting redgreen
Emotional response might be one big problem, but take that away and go to a casino and you won't achieve much in the long run because the odds are against you. Same with forex, unless you manage to have a mathematical edge your chances of making money in the long run are slim regardless of how good your money management, discipline and emotional control are. Because spreads and comission are part of the "house edge", theoretically it could be that trading on larger time frames with bigger sl and tp reduces the house edge and increases the chances...
I don't want to beat you up, but trading is 50:50 and is not based on "house" rules. It is more like you betting your friend on a game of football with a points spread.

I also am willing to bet (lol) that you "feel" emotions when you are in the casino betting your money. In a casino you cannot take back any part of the bet, so you are stuck with your decision, which makes it a little easier to accept. There is no rational thought required after the wager is placed. In Forex, you can change your mind before you lose it all, so that rational thought now has to be placed on top of the emotional sensations. If you cannot get the rational thought to win the argument within yourself, you will accept the total loss. Just like a gambler is required to do. Do you see though, that it is not gambling because you can "rationally" remove your money from the wager?
You cannot be extraordinary by being normal
  • #9
  • Feb 21, 2015 9:25am Feb 21, 2015 9:25am
Quoting dkrock
Hello. By your analysis, should I conclude you have not made a Forex trade yet? It seems to me that commission is commission, and is not applied against the leverage, but against position size. At least that is how my commission is calculated. $X times number of lots. It seems to me you are analyzing position trades of equities with Forex. Why would anyone have a stop of 250 pips? That is ridiculous. Volatility is your best friend. Without it, the market is flat and you make nothing. You reference volatility of your account balance. ?HUH? I am sorry...

I gotta say this is one of the best posts I've ever read on FF, absolutely spot on....I especially liked the reference to the "ocean" as we all know prices move in waves yet as soon as price starts to wave against us we panic close out only to see the price start to wave back our way.

Once I realised we have to trade the waves and that the waves are all part of trading, it all began to take shape... Don't fear the waves, ride the waves buy the bottom of waves and sell the tops of waves. Learn to ride the waves and you'll be riding your emotions too..

Great post....
Feel the Fear and do it anyway!!!
  • #10
  • Feb 21, 2015 10:00am Feb 21, 2015 10:00am
My 2 cents is that biggest reason a trader may lose money in the long run is " lack of patience ". You need to wait for a high probability trade.
  • #11
  • Feb 21, 2015 11:16am Feb 21, 2015 11:16am
Hi,

as an old gambler, I have to stand beside Mr. Redgreen here, bcoz you guys are just totally skipping part of trading, which is math and bet. So first of all, this is nonscence:
Quoting dkrock
I don't want to beat you up, but trading is 50:50 and is not based on "house" rules.
If you shoot random like monkey, you are going to be below 50%, thanks to spread and commissions. Not even counting tech things like lattency+slippage+ brokers influence. I dont even count "conspiracy" things like information disadvantage and insider trading. Is not 50/50, thats absurd. Thats the "housedge" Redgreen was talking about.

Quoting albchr
Simply not true. If it were, then how do you explain those who make a living from trading?
I explain it they have beaten "house edge" ( to stay at the same term) with right analysis, whether FA or TA doesnt matter.

Back to math and bet: So, you fighters againts gambling principles, tell me. Are you 100% sure you always do right bet? No, I hear you say? So one could conclude, if you analyzed everything, and are 70% sure market is gonna move up there and bet, those remaining 30% are what? They just poof in the air, disappear in math or what? As an old gambler, I know. The remaining 30% are external shocks to your plan. You can never be certain what life brings you. In essence whole life could be considered gamble, coz you never know what happens tomorrow. All we can do is to stack percentage in our favour by living the right life and making the right choices.

T
"I know one thing, that I know nothing." Sokrates
  • #12
  • Edited 11:57am Feb 21, 2015 11:46am | Edited 11:57am
Quoting replaced
I think I've figured out why so many people lose money in Forex. I think that there are three main factors involved. They would be commissions, leverage, and volatility. The first factor is commissions. If a commission is 0.2, on 10k that's just 20 cents. Not bad, right? Wrong. You'll obviously need to close the trade so that's 0.4 pips roundtrip. Then if leverage is involved, such as 20x. You're paying commissions on 20x your money which means 20x the cost. So that 40 cents roundtrip just turned into 8 dollars per round trip trade, or 0.08% of...
[/b]. The best theoretical ROI is probably 1x leverage and a long term position with no stop loss/gain since it minimizes losses from commissions and leverage. {image} {file}[/quote]

Do you have any evidence to support this claim?

You also forgot that people lose money trading forex, because they come on places like ForexFactory and listen to others who say they have the best profitable strategy, with no evidence of performance.

Quoting dkrock
Hello. By your analysis, should I conclude you have not made a Forex trade yet? It seems to me that commission is commission, and is not applied against the leverage, but against position size. At least that is how my commission is calculated. $X times number of lots. It seems to me you are analyzing position trades of equities with Forex. Why would anyone have a stop of 250 pips? That is ridiculous. Volatility is your best friend. Without it, the market is flat and you make nothing. You reference volatility of your account balance. ?HUH? I am sorry...
The OP needs to read your comment and think about his life.

People lose money trading forex when they come on forex factory and listen to people like him.

The reasons why traders lose money trading forex:

- Poor Strategy e.g. poor entry, poor exit, poor money management, poor risk management
- Poor analytic skills
- Poor problem-solving skills
- Poor discipline e.g. no patience, too emotional

I have no idea why the OP is writing all that jargon tbh, it seems like you have never traded a day in your life from the reasons you stated.
Trade smart, not hard
  • #13
  • Feb 21, 2015 11:57am Feb 21, 2015 11:57am
Quoting Tom_D_Trader
Hi, as an old gambler, I have to stand beside Mr. Redgreen here, bcoz you guys are just totally skipping part of trading, which is math and bet. So first of all, this is nonscence: {quote} If you shoot random like monkey, you are going to be below 50%, thanks to spread and commissions. Not even counting tech things like lattency+slippage+ brokers influence. I dont even count "conspiracy" things like information disadvantage and insider trading. Is not 50/50, thats absurd. Thats the "housedge" Redgreen was talking about. {quote} I explain it they...
Hey Tom

First off, I'm not and never have fought against gamblers. There's a place for having fun by leaving everything to chance. Trading however ... is not it.

I have never applied "math" and I never "bet" in my trading. As you say I apply my analysis based on my experience and place an order. Am I always 100% right on direction? Not a chance. BUT, unlike a gambler, once I've placed my "bet" << lol ... I have options with "that" bet. I can cut my loss shorter than my initial risk, analyze further and add to it to cost average it back to around BE or better, or any one of a dozen other ways to get out with no damage and even profit.

When you "bet" as a gambler, do you have such options on "that" bet with your initial risk? No. It's win or loose ... period. Just saying ...

Hope you're having a great weekend brother.
Ghost Rider - WWTBMD?
  • #14
  • Edited 12:31pm Feb 21, 2015 12:06pm | Edited 12:31pm
Quoting dkrock
Hello. By your analysis, should I conclude you have not made a Forex trade yet?
That's correct. However I can still analyze what would probably happen if someone were to trade Forex.

Quoting dkrock
It seems to me that commission is commission, and is not applied against the leverage, but against position size. At least that is how my commission is calculated. $X times number of lots. It seems to me you are analyzing position trades of equities with Forex.
My calculator isn't perfect but it's still very accurate in determining what would happen. In this example, I assumed the trader had one position and 1:1 leverage meant that the position itself was equal to the entire equity of the account. Of course in real life it's not completely accurate as there are lot sizes to deal with. I've spent enough time with this calculator, something like that would be too complicated and wouldn't change the outcome by much.

Quoting dkrock
Why would anyone have a stop of 250 pips? That is ridiculous. Volatility is your best friend. Without it, the market is flat and you make nothing. You reference volatility of your account balance. ?HUH? I am sorry to say, but you did a lot of work for nothing and are all worried about nothing. Your scenario is pretty far-fetched in my opinion.
It was just a simple example to show a point. If you had 10 trade loses in a row of 25 pips, then can't you still lose 250 pips and be in the same situation?

Quoting dkrock
Forex is not really that great for buy and hold strategies. It is awesome for intra day trading though. Forex is not good for long term charts. You can make a fortune on short term charts though. Recommend you go back to the drawing board and forget about this analysis. It is not accurate. By the way, the main reason people lose is emotional response.
Actually intraday trading means that your volatility is less and you're more likely to lose money according to my calculator. The reason why is because commissions as a percentage of possible gain/loss will be higher. For example, if the maximum you can make in a trade is 50 pips and roundtrip comission is 0.4 pips, then your ROI would have to be greater than 0.8% just to pay off the commission. If the maximum amount of money you can make in a trade is 500 pips, then your ROI would have to be greater than 0.08% to pay commission. As you can see it gives you higher ROI by making longer term bets.

Quoting dkrock
Once real money is used in the market, your anxiety level increases. If it is not controlled, the result is panic mode which causes rational thought to stop. Think of someone who is afraid of swimming and panics in 4 feet of water. Rather than merely standing up, they drown. In essence, volatility is actual responsible for this, but it is also the trader. Market makers realize most people stare at the candles, so they cause them to jump all over the place to enhance your emotional response. This is why successful line traders use profit targets...
Emotions have nothing to do with gains/loses in my calculator. Why is someone bound to consistently lose in my calculator? Forex is very random. I doubt anyone can predict the order in which buy/sells occur. Trying to figure that out is like trying to make a system for what the next coin flip will be.

Quoting dkrock
This is why successful indicator traders use crossovers so they can ignore the action of individual candles and trade on a larger sample size of the market. However, it is a learned skill. Until you learn to do it, you will most likely fail because the "motion of the ocean" is purposely designed to make you fail. You will have no choice really, because your emotional response will cancel out your rational response. You will feel like you are drowning, even though you are actually quite safe. Everyone must experience it. Those who overcome it increase...
Just as there are computers out there making pennies by triangular arbitrage, I'm sure there's computers that have analyzed every tick for the past 20 years in order to determine whether or not there is a 0.001% chance of making money on a trade through HFT. Are you saying that you're better than a computer that can place trades in milliseconds when an opportunity arises? My calculator is emotionless and still shows that someone with 1:20 leverage is guaranteed to lose everything after 3000 trades. Why is this?
  • #15
  • Feb 21, 2015 12:25pm Feb 21, 2015 12:25pm
Quoting albchr
When you "bet" as a gambler, do you have such options on "that" bet with your initial risk? No. It's win or loose ... period. Just saying ... Hope you're having a great weekend brother.
Thx for asking, am having a pretty bad weekend coz lost about 2% this week on my Yen bets . Shit happens. Btw, ofc gambler can manage initial risk, especially in things like gambling with life. You always can do a good decision to split universe in your favour.

But mate, you are talking to professional poker player and also a guy who often calls himself bachelor of chaos . I totally dont believe anything in our life is granted. I have lost quite lots already, no matter what decision I have made - and not talking forex here. It resulted in me having totally no plan, when it comes to both my life and trading. Am saying I have a plan, just so you guys dont call me idiot and I dont have to explain how chaos works and how universe is splitted every second in infinite paralel ones. Am very chaotic and base my decisions on values. These values are very often simple things, like family, friends, home and stuff. When it comes to trading, these values are cash, cash, fun, cash, cash, I wanna be right, cash, fun.

So, my belief nothing is granted results in this: In every single aspect of life, you have a slight percentage caused by external factors it is not gonna work as you planned. This slight percentage is called uncertainity and is the "gamble" part of life. If you go to grocery for a bread, you gamble with 99% win chance you get a bread, while at the same time you gamble with 75% chance you get a fresh one. You gamble with 40% chance they are gonna act nice to you there, 20% chance you are gonna meet a nice girl there.

What I am saying, there is uncertainity everywhere you go. Back to that trading. So you enter - not 100% sure - say 70%, so 30% is gamble. Then you watch PA and nurse your trade, we all do that. While doing that, you are stacking odds in your favour, trying to minimize the gambling part. So you reanalyze and reanalyze every second, to avoid gambling. Is the right choice, but gambling=uncertainity is still involved.

T
"I know one thing, that I know nothing." Sokrates
  • #16
  • Feb 21, 2015 12:43pm Feb 21, 2015 12:43pm
Quoting Tom_D_Trader
Am saying I have a plan, just so you guys dont call me idiot and I dont have to explain how chaos works and how universe is splitted every second in infinite paralel ones. Am very chaotic and base my decisions on values. These values are very often simple things, like family, friends, home and stuff. When it comes to trading, these values are cash, cash, fun, cash, cash, I wanna be right, cash, fun.
To expand here, I call it a plan because of you guys here, but all I have is expectations. I expect with some certainity it is gonna go somwhere and bet on it - according to my certainity. But am all the time prepared for external variable totally screwing my trades and go against my values - in FX beeing mostly cash. So should it fack up, I have no problem acknowledging my "plan" sucks and bail out. On the other hand, should it happen external variable goes in my favour, ofc I wont follow my "plan" and imediatelly TP, but adapt to new market circumstances making new "plan".
"I know one thing, that I know nothing." Sokrates
  • #17
  • Feb 21, 2015 1:18pm Feb 21, 2015 1:18pm
Dkrock

Edge is a mathematical concept. Just because I made a reference with the house edge from gambling doesn't mean the concept doesn't apply in trading. You need a mathematical edge in order to make money in the long run from any type of speculation. Other terms are profit factor, expectancy or expected value. If you don't understand these concepts or even more deny their importance in any type of speculative activity I don't have time to explain them to you but I recommend you do some research on the subject (it's not rocket science).

The reference to a casino was made because it is popular, "house edge" is a well known phrase, and because gamblers like most retail fx traders have no clue what edge/ expectancy is and that's why they keep throwing money away.

You said I bet like a gambler. Incorrect. I wouldn't place a bet or speculative investment or trade without having the convinction in advance preferably with proof, that I have an edge from a mathematical point of view on that bet/trade/invrestment. That's why I wouldn't place a bet at a casino because I don't have a positive expectancy. Problem with most retail dreamers is that they have no clue what a simple concept like edge/expectancy is... You think you understood my post but you clearly didn't and that's because you don't know the simple math behind positive expectancy/profit factor/edge.
  • #18
  • Feb 21, 2015 1:30pm Feb 21, 2015 1:30pm
Quoting replaced
My calculator is emotionless and still shows that someone with 1:20 leverage is guaranteed to lose everything after 3000 trades. Why is this?
Coz you wrote it wrong. You have based your views on market beeing random. According to your calculation, no strategy is profitable, no matter leverage. You have 50/50 without commission, with it, you are below 50. If random, long term you always loose. All you did is you counted, that if someone knows total shit and invests random, the higher leverage, the sooner he looses. Or thats how I understand your *.xls sheet.

There go this theory of effective markets, which could be applied to FX, as is one of the most effective markets in the world. Basically theory is saying all informations available are instantly absorbed by price, so no matter how you analyze, it is already priced in, so you lost from start and is random. However, back to philosophy, you simply cant be saying all informations in universe are available to everyone. Life is not effective and neither is market. There are always holes.
"I know one thing, that I know nothing." Sokrates
  • #19
  • Feb 21, 2015 1:36pm Feb 21, 2015 1:36pm
Quoting albchr
{quote} When you "bet" as a gambler, do you have such options on "that" bet with your initial risk? No. It's win or loose ... period. Just saying ... Hope you're having a great weekend brother.
Incorrect.

There are professional "gamblers" out there who not only make a living out of it but they actually made millions with it. They approach every bet wether it's poker, trading, stock buying, blackjack with cards counting etcfrom the mathematical concept of edge/expected value. They use mathematical approaches to estimate probabilities and their edge and bet according to that.

You can have an edge in trading with TA or FA but if you don't understand the concept of edge... It's like you are lurking with no visibility in a dark room filled with sharp corners, hoping to get lucky.
  • #20
  • Feb 21, 2015 1:43pm Feb 21, 2015 1:43pm
Also Replaced, to progress with this random thingie of yours. You think is random when SNB leaves peg to Eur, that is Eur sell and CHF buy? You just cant be serious calling it random.
Quoting redgreen
There are professional "gamblers" out there
Am now starting to think heavy am gonna go play poker to make up those 2% out of Yen trades ..... its my life, cant help it. I just love to bet on my mind....

Well ok, am off for poker. Cya later gamblers... See, thats the funny thing, I have FX and poker cash in the same investment pile.
"I know one thing, that I know nothing." Sokrates
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