Why private investors lose their money

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Let’s consider the following statement. If it’s true that the market can only go up or down over the long-term, then using the most basic 1:1 risk/reward ratio, there should be at least 50% winners, shouldn’t there? Well, there isn’t. This article debates in favour of the notion that a trader is their own worst enemy, and that human error is at the root of most problems. In short, the main reason why Forex traders lose money is no rocket science. It’s the traders themselves.

Financial trading, including the currency markets, requires long and detailed planning on multiple levels. Trading cannot commence without a trader’s understanding of the market basics, and an ongoing analysis of the ever changing market environment. For those interested in investing and trading, read through the suggestions below and you will learn how to avoid losing money in Forex trading.

Overtrading

Overtrading – either trading too big or too often – is the most common reason why Forex traders fail. Overtrading might be caused by unrealistically high profit goals, market addiction, or insufficient capitalisation. We will skip unrealistic expectations for now, as that concept will be covered later in the article.

Insufficient capitalisation

Most traders know that it takes money to make a return on their investment. One of Forex’s biggest advantages is the availability of highly leveraged accounts. This means that traders with limited starting capital can still achieve substantial profits (or indeed losses) by speculating on the price of financial assets.

Whether a substantial investment base is achieved through the means of high leverage or high initial investment is practically irrelevant, provided that a solid risk management strategy is in place. The key here is to ensure that the investment base is sufficient. Having a sufficient amount of money in a trading account improves a trader’s chances of long-term profitability significantly – and also lowers the psychological pressure that comes with trading.

As a result, traders risk smaller portions of the total investment per trade, while still accumulating reasonable profits. So, how much capital is enough? Here it is important to learn how to stop losing money in Forex trading due to improper account management. The minimum Forex trading volume any broker can offer is 0.01 lot.

This is also known as a micro lot and is equivalent to 1,000 units of the base currency that is being traded. Of course, a small trade size is not the only way to limit your risk. Beginners and experienced traders alike need to think carefully about the placement of stop-losses. As a general rule of thumb, beginner traders should risk no more than 1% of their capital per trade. For novice traders, trading with more capital than this increases the chances of making substantial losses.

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Carefully balancing leverage whilst trading lower volumes is a good way to ensure that an account has enough capital for the long-term. For example, to place one micro lot trade for the USD/EUR currency pair, risking no more than 1% of total capital, would only require a $250 investment on an account with 1:400 leverage. However, trading with higher leverage also increases the amount of capital that can be lost within a trade. In this example, overtrading an account with 1:400 leverage by one micro lot quadruples potential losses, compared to the same trade being placed on an account with 1:100 leverage.

Trading Addiction

Trading addiction is another reason why Forex traders tend to lose money. They do something institutional traders never do: chase the price. Forex trading can bring a lot of excitement. With short-term trading intervals, and volatile currency pairs, the market can be fast paced and cause an influx of adrenaline. It can also cause a huge amount of stress if the market moves in an unanticipated direction.

To avoid this scenario, traders need to enter the markets with a clear exit strategy if things aren’t going their way. Chasing the price – which is effectively opening and closing trades with no plan – is the opposite of this approach, and can be more accurately described as gambling, rather than trading. Unlike what some traders would like to believe, they have no control or influence over the market at all. On certain occasions, there will be limits to how much can be drawn from the market.

When these situations arise, smart traders will recognise that some moves are not worth taking, and that the risks associated with a particular trade are too high. This is the time to exit trading for the day and keep the account balance intact. The market will still be here tomorrow, and new trading opportunities may arise.

The sooner a trader starts seeing patience as a strength rather than a weakness, the closer they are to realising a higher percentage of winning trades. As paradoxical as it may seem, refusing to enter the market can sometimes be the best way to be profitable as a Forex trader.

If you feel confident that you can avoid trading addiction when trading, why not open a Forex trading account with Admiral Markets? Traders who choose Admiral Markets can trade with an award-winning, fully regulated broker that provides access to over 40 CFDs on currency pairs, tight spreads, fast deposits & withdrawals, and so much more! Click the banner below to start trading Forex today!

Not Adapting to the Market Conditions

Assuming that one proven trading strategy is going to be enough to produce endless winning trades is another reason why Forex traders lose money. Markets are not static. If they were, trading them would have been impossible. Because the markets are ever-changing, a trader has to develop an ability to track down these changes and adapt to any situation that may occur.

The good news is that these market changes present not only new risks, but also new trading opportunities. A skilful trader values changes, instead of fearing them. Among other things, a trader needs to familiarise themselves with tracking average volatility following financial news releases, and being able to distinguish a trending market from a ranging market.

Market volatility can have a major impact on trading performance. Traders should know that market volatility can spread across hours, days, months, and even years. Many trading strategies can be considered volatility dependent, with many producing less effective results in periods of unpredictability. So a trader must always make sure that the strategy they use is consistent with the volatility that exists in the present market conditions.

Financial news releases are also important to keep track of, even if a selected strategy is not based on fundamentals. Monetary policy decisions, such as a change in interest rates, or even surprising economic data concerning unemployment or consumer confidence can shift market sentiment within the trading community.

As the market reacts to these events, there’s an inevitable impact on supply and demand for respective currencies. Lastly, the inability to distinguish trending markets from ranging markets, often results in traders applying the wrong trading tools at the wrong time.

Poor Risk Management

Improper risk management is a major reason why Forex traders tend to lose money quickly. It’s not by chance that trading platforms are equipped with automatic take-profit and stop-loss mechanisms. Mastering them will significantly improve a trader’s chances for success. Traders not only need to know that these mechanisms exist, but also how to implement them properly in accordance with the market volatility levels predicted for the period, and for the duration of a trade.

Keep in mind that a ‘stop-loss to low’ could liquidate what could have otherwise been a profitable position. At the same time, a ‘take-profit to high’ might not be reached due to a lack of volatility. Paying attention to risk/reward ratios is also an important part of good risk management.

What is the Risk Return Ratio?

The Risk/Reward Ratio (or Risk Return Ratio/ RR) is simply a set measurement to help traders plan how much profit will be made should a trade progress as anticipated, or how much will be lost in case it doesn’t. Consider this example. If your ‘take-profit’ is set at 100 pips and your stop-loss is at 50 pips, the risk/reward ratio is 2:1. This also means that you will break-even at least every one out of three trades, providing that they are profitable. Traders should always check these two variables in tandem to ensure they fit with profit goals.

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Not Having or Not Following a Trading Plan

How else do Forex traders lose money? Well, a poor attitude and a failure to prepare for current market conditions certainly plays a part. It’s highly recommended to treat financial trading as a form of business, simply because it is. Any serious business project needs a business plan. Similarly, a serious trader needs to invest time and effort into developing a thorough trading strategy. As a bare minimum, a trading plan needs to consider optimum entry and exit points for trades, risk/reward ratios, along with money management rules.

Unrealistic Expectations

There are two kinds of traders that come to the Forex market. The first are renegades from the stock market and other financial markets. They move to Forex in search of better trading conditions, or just to diversify their investments. The second are first-time retail traders that have never traded in any financial markets before. Quite understandably, the first group tends to experience far more success in Forex trading because of their past experiences.

They know the answers to the questions posed by novices, such as ‘why do Forex traders fail?’ and ‘why do all traders fail?’. Experienced traders usually have realistic expectations when it comes to profits. This mindset means that they refrain from chasing the price and bending the trading rules of their particular strategy – both of which are rarely advantageous. Having realistic expectations also relieves some of the psychological pressure that comes with trading. Some inexperienced traders can get lost in their emotions during a losing trade, which leads to a spiral of poor decisions.

It’s important for first-time traders to remember that Forex is not a means to get rich quickly. As with any business or professional career, there will be good periods, and there will be bad periods, along with risk and loss. By minimising the market exposure per trade, a trader can have peace of mind that one losing trade should not compromise their overall performance over the long-term.

Make sure to understand that patience and consistency are your best allies. Traders don’t need to make a small fortune with one or two big trades. This simply reinforces bad trading habits, and can lead to substantial losses over time. Achieving positive compound results with smaller trades over many months and years is the best option.

In Summary

There we have it, the main reasons why Forex traders fail and lose money, along with the steps traders need to take in order to prevent them from occurring. Studying hard, researching and adapting to the markets, preparing thorough trading plans, and, ultimately, managing capital correctly can lead to profitability. Follow these steps and your chances for consistent success in trading will improve dramatically!

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About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

#1 Reason Why Investors Lose Money

You’re about to discover the #1 reason why too many investors lose money on some real estate investing deals and how you can easily avoid this major pitfall. It’s not complicated but it requires an understanding of why real estate entrepreneurs fall into this trap as well as how to cultivate the discipline to stay out of it. Learn about margin of safety and how it applies to real estate investing. And fascinatingly enough, this lesson applies to all investors, not just real estate investors. You’ll learn about the history of this wisdom and who made it popular. Most importantly, by heeding this warning, you’ll equip yourself with knowledge that could save you from financial disaster. Here’s the #1 reason why investors lose money:

Where Investors Go Wrong

Margin of Safety

Margin of safety or margin of error, is the idea that you are going to build a deal with room for mistakes. If you make a mistake in your analysis a margin of safety will help protect you by ensuring that you still make money; even if it is not quite as much as you had originally hoped for.

Ben Graham

Benjamin Graham is the author of the book The Intelligent Investor, and Warren Buffett’s personal mentor. He is also the person that brought the concept of a “margin of safety” to the mainstream world of investing advice. He believes in the idea that if you buy a stock you should build in a margin of safety to protect you if your analysis of the intrinsic value of the stock is off. If you make wrong assumptions or calculation errors, the margin of safety is there to protect you from a loss.

The same concept can be applied to any real estate situation such as: An all cash purchase, a combination of a traditional bank loan and your own down payment, or even a hard money loan and down payment, or subject-to, where you give the homeowners some money to catch up their back payments. It also applies to any type of real estate deal you close on such as fix and flips, fix and rents, auctions, wholesaler flip, or immediate resells. If the property is closed on, you should apply a margin of safety to it.

Exclusions:

Any deal that does not involve you closing on it, does not require a margin of safety. This includes deals where you are receiving a commission, deals that involve you assigning your interest, and deals that are immediately flipped without putting any sort of cash or credit towards it.

What Should Your Margin of Safety Be?

A margin of safety isn’t really a percentage because percentages break down when the price of the property gets too low or really high. Instead, the margin of safety is a gut reaction when you are looking at the numbers.

2 Main Mistakes

Estimated value

It is also referred to as the ARV, or After Repair Value, but because not everyone will be fixing up their real estate property, I call it the “estimated value.” The estimated value is what the property is going t be worth when you are buying. It is very common for real estate investors to be overly optimistic when determining what a property will sell for.

On the other side of the coin, they underestimate how much it’s going to take to renovate. Investors will often look at a house and assume that it will only need some minor renovations, when in fact there can be huge problems just waiting to be found.

That is what is so interesting about the concept of margin of safety, because it is actually best to be pessimistic. You need to look at the neighborhood comps and determine all of the things that the other houses have that your house doesn’t. Find the reasons why your property might not pull as high of numbers, as you originally thought.

Pessimism

Be pessimistic. I know it is a strange thing to read, but it is what you have to do in order to build in a margin of safety. You must be pessimistic on how much the house will sell for once you own it, and then you have to be pessimistic on how much it will cost for you to renovate it. You can try to apply some sort of rule of thumb, like adding 20% to your original cost assessment, and assuming it will sell for 10% less then you’ve predicted, but that breaks down a lot.

Example

I recently purchased a condo for $375,000 with an appraisal price of $600,000. This deal gave me plenty of wiggle room and the condo needed very little work, so I was very excited. But then after I closed on it I discovered that the condo did not have the correct kind of licensing for what is called a transient, which is where you turn the condo into a nightly rental. I also found out that it did not have access to the HOA amenities such as the pool or parking. Even though I had read through the HOA docs, I was in a hurry to close, and completely missed this information. Now, these two things might seem like minor details but they actually changed the property value by $100,000. Instead of $600,000, the deal is actually worth $500,000. Thankfully I had a margin of safety so I was still able to make some money off this deal, but what if I hadn’t? If I purchased a property for $450,000, thinking it would sell for $600,00 but it ended up only being worth $500,000, that is a huge difference in potential income.

You Must Have a Margin of Safety

Applying this concept to all of my deals is the reason I have been successful year after year. During the meltdown and bursting of the bubble of the real estate market, I remained successful, by always implementing a margin of safety in all of my deals. I never took on more then I could chew, because even if my assumptions were wrong, I was still making money. The best part is that sometimes your assumptions and calculations are wrong in the other directions, and you actually end up making more money.

Discipline

In an interesting interview I watched with Warren Buffett and Steve Forbes, the editor of the Forbes magazine, Steve asked Warren a very simple question. He said, “A lot of people know about value investing and contrarian investing, the idea of evaluating the intrinsic value of a business or a stock, and waiting for the right price to buy it at, but Warren, you’ve been better than everybody at that. One of your major difference that made you better than everyone else was discipline.” “You have discipline when you’re making decisions, because it can be very tempting to want to take on a deal, especially if you want to have deal flow going on.”

Real estate investors know what I am talking about. You feel the need to have some deals in the works, so that you are continuously making more money, so you are more prone to break some of your margin of safety rules and pick up deals at a higher price point then you should.

In the Warren Buffet interview, Warren said, “It is not always about the home runs I’ve hit. It’s about all the deals that I didn’t lose money on. You know, either I broke even, did a little bit better.” He said, “The rule number 1 of investing is to not lose money, and rule number 2 is to not forget rule number 1.” When you have this margin of safety, it’s not always that you hit home runs, it’s that you avoid going backwards, because going backwards can be incredibly debilitating. Not only demoralizing, from an emotional standpoint, but also from a financial standpoint.

Less Deals

When you are able to build in that margin of safety, you give yourself the opportunity to insure that even if your assumptions are wrong, you still make money. It requires discipline, because that means you’re going to walk away from more deals.

Is that a bad thing?

At first glance it might seem like less deals is a bad thing. When you apply a margin of safety you will pass on more deals because they will not meet your new requirements. However, this is a safety net that assures you are not going backwards, which means the deals you are actually going to do are productive. This concept forces you to think in terms of how to monetize deals which means you will get better at flipping properties. You could even choose to get your real estate license in order to receive commission referrals.

I am very careful about the deals that I close on, whether I am putting my money or someone else into the deal. It doesn’t make a difference because if you are going to be guaranteeing a loan or even if you are signing on behalf of your LLC, you need to do the right thing and make sure you are making the best decisions for the deals that you close on.

I hear a lot of people complain about how hard money lenders have a 65 cents on the dollar rule, which means that you need to buy the property at 65 cents of its today’s as is value. People complain because they are not sure they will be able to find a deal that good, but even though it is a lot more difficult to find these good deals, but it works as a great checks and balances, because if you find a deal that cheap, your margin of safety is already built in.

No Perfect Percentage

Everyone has a different threshold when determining what their margin of safety number is. There is not set rule of thumb for determining the perfect percentage because as the deal goes up in value, 65 cents on the dollar is a steal of a deal. It is not about the percentage, it is about you looking at the numbers and then making some pessimistic assumptions. It is looking at a situation and what could go wrong and determining how much money you need in order to have some wiggle room for problems that arise. It also depends on your threshold of profit. For me personally, I look for bigger profits or I don’t take the time to mess with the deal, whereas you may be okay with less profits, while still having that margin of safety.

In Conclusion

I hope that this will make a dramatic impact on your investing endeavors, because it can make all the difference in the world between being successful and going backwards. Oftentimes, it’s about moving forward slowly rather than always hitting big home runs. It’s about being pessimistic about what a property is really worth and what it’s really going to cost to fix it up, but at the same time, keeping an overall 30,000 foot view of optimism on your real estate investing business. Margin of safety does not slow you down it just adjusts the way in which you operate. You still make money on them, you’re just not making as much money.

Scientist Discovered Why Most Traders Lose Money – 24 Surprising Statistics

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Scientist Discovered Why Most Traders Lose Money – 24 Surprising Statistics

“95% of all traders fail” is the most commonly used trading related statistic around the internet. But no research paper exists that proves this number right. Research even suggests that the actual figure is much, much higher. In the following article we’ll show you 24 very surprising statistics economic scientists discovered by analyzing actual broker data and the performance of traders. Some explain very well why most traders lose money.

  1. 80% of all day traders quit within the first two years. 1
  2. Among all day traders, nearly 40% day trade for only one month. Within three years, only 13% continue to day trade. After five years, only 7% remain. 1
  3. Traders sell winners at a 50% higher rate than losers. 60% of sales are winners, while 40% of sales are losers. 2
  4. The average individual investor underperforms a market index by 1.5% per year. Active traders underperform by 6.5% annually. 3
  5. Day traders with strong past performance go on to earn strong returns in the future. Though only about 1% of all day traders are able to predictably profit net of fees. 1
  6. Traders with up to a 10 years negative track record continue to trade. This suggests that day traders even continue to trade when they receive a negative signal regarding their ability. 1
  7. Profitable day traders make up a small proportion of all traders – 1.6% in the average year. However, these day traders are very active – accounting for 12% of all day trading activity. 1
  8. Among all traders, profitable traders increase their trading more than unprofitable day traders. 1
  9. Poor individuals tend to spend a greater proportion of their income on lottery purchases and their demand for lottery increases with a decline in their income. 4
  10. Investors with a large differential between their existing economic conditions and their aspiration levels hold riskier stocks in their portfolios. 4
  11. Men trade more than women. And unmarried men trade more than married men. 5
  12. Poor, young men, who live in urban areas and belong to specific minority groups invest more in stocks with lottery-type features. 5
  13. Within each income group, gamblers underperform non-gamblers. 4
  14. Investors tend to sell winning investments while holding on to their losing investments. 6
  15. Trading in Taiwan dropped by about 25% when a lottery was introduced in April 2002. 7
  16. During periods with unusually large lottery jackpot, individual investor trading declines. 8
  17. Investors are more likely to repurchase a stock that they previously sold for a profit than one previously sold for a loss. 9
  18. An increase in search frequency [in a specific instrument] predicts higher returns in the following two weeks. 10
  19. Individual investors trade more actively when their most recent trades were successful. 11
  20. Traders don’t learn about trading. “Trading to learn” is no more rational or profitable than playing roulette to learn for the individual investor. 1
  21. The average day trader loses money by a considerable margin after adjusting for transaction costs.
  22. [In Taiwan] the losses of individual investors are about 2% of GDP.
  23. Investors overweight stocks in the industry in which they are employed.
  24. Traders with a high-IQ tend to hold more mutual funds and larger number of stocks. Therefore, benefit more from diversification effects.

Conclusion: Why Most Traders Lose Money Is Not Surprising Anymore

After going over these 24 statistics it’s very obvious to tell why traders fail. More often than not trading decisionsВ are not based on sound research or tested trading methods, but on emotions, the need for entertainmentВ and the hope to make a million dollars in your underwear.В What traders always forget is that trading is a profession and requires skills that need to be developed over years. Therefore,В be mindful about your trading decisions and the view you have on trading. Don’t expect to be a millionaire by the end of the year, but keep in mind the possibilities trading online has.

————

– 1 Barber, Lee, Odean (2020): Do Day Traders Rationally Learn About Their Ability?
– 2 Odean (1998): Volume, volatility, price, and profit when all traders are above average
– 3 Barber, & Odean (2000): Trading is hazardous to your wealth: The common stock investment performance of individual investors
– 4 Kumar: Who Gambles In The Stock Market?
– 5 Barber, Odean (2001): Boys will be boys: Gender, overconfidence, and common stock investment
– 6 Calvet, L. E., Campbell, J., & Sodini P. (2009). Fight or flight? Portfolio rebalancing by individual investors.
– 7 Barber, B. M., Lee, Y., Liu, Y., & Odean, T. (2009). Just how much do individual investors lose by trading?
– 8 Gao, X., & Lin, T. (2020). Do individual investors trade stocks as gambling? Evidence from repeated natural experiments
– 9 Strahilevitz, M., Odean, T., & Barber, B. (2020). Once burned, twice shy: How naГЇve learning, counterfactuals, and regret affect the repurchase of stocks previously sol.
– 10 Da, Z., Engelberg, J., & Gao, P. (2020). In search of attention
– 11 De, S., Gondhi, N. R. & Pochiraju, B. (2020). Does sign matter more than size? An investigation into the source of investor overconfidence

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