Why Forex Traders Lose Money

The Forex markets exist to facilitate international business. Thus the bulk of Forex trading is done to make payments for products and services in foreign currencies. However, speculators can profit from swings in the relative values of currencies and in fact speculator help smooth out the currency markets with constant trading. Although speculators trader Forex for the profits this does not always work out. Why Forex traders lose money is not just bad luck but rather that trader neglect to use time honored approaches to markets. Fundamental analysis, technical analysis, various Forex strategies and Forex options are the lynch pins of successful Forex trading. Neglecting these pillars or Forex success is why Forex traders lose money.

Fundamental Analysis

The eventual price of dollars as denominated in yen or yen as denominated in euros depends on the strength of the economies involved, the nations’ balance of payments, monetary policy national debt. When trading a currency pair traders are wise to learn the factors that drive each currency and thus the exchange rate. Although market factors may drive prices up and down based on fear, greed and market manipulation is the fundamentals that eventually set the price of a currency. In swing trading why Forex traders lose money is that they misread the fundamentals.

Technical Analysis

Hundreds of years ago in places like the tulip bulb market in Holland and the rice market in Japan traders learned that many price patterns were repetitive. It was possible to trade profitably by simply reading the first part of a market pattern and then executing a trade to take advantage of the later part. The fact that the past predicts the future in Forex trading is the basic of Forex technical analysis. Technical analysis works best with currency pairs that trade at high volume. Thus it is best apply this approach with the major currencies.

  • U.S. Dollar, USD
  • Euro, EUR
  • Yen, JPY
  • British Pound, GBP
  • Swiss franc, CHF
  • Canadian Dollar, CAD
  • Australian Dollar, AUD
  • South African Rand, ZAR

Minor currencies may be attractive because of their volatility but be careful when trying to apply technical analysis tools to pairs that trade very thinly with low volume and lower liquidity.

Basic Forex Strategies

Many times the market is such that the path to Forex profits is not clear. In such cases traders often hedge their bets by combining calls and puts, buying and selling. Traders use Forex options to lock in prices at opportune moments. The point is to protect against loss while maintaining the opportunity for gaining profits. A simple approach in a volatile market is the long straddle. A trader purchases both a call option and a put option on the same currency pair with the same strike price and expiration date. If the price of the transaction currency goes up in relation to the reference currency the trader profits from the call contract. And if the transaction currency does down versus the reference currency the put contract is profitable. The maximum cost of this strategy is the price of the call and put contracts. There are other, more complicated, Forex strategies but they follow the same rule of containing potential loss while maintaining the opportunity for a profit.