Losing Money Trading FX

We all know the statistic, and it’s not a pretty one. According to CRB, “Ninety-two percent of day traders trying to scalp lose money. Only eight percent are successful. Out of the eight percent, only two percent of the day trading public makes money on a consistent basis.” Why then, when these numbers are so widely publicized, would so many newer traders come into the market each and every day and try to earn a killing? It’s simple: economics. The majority of the human population is economically driven, and there’s no justice to go into the reasons as to why. It’s why lottery games where individuals have a 1 in 47 million chance of winning keep getting millions upon millions of people trying twice a week to hit the jackpot. People want money, and they want it now.

I get a lot of emails from people aching over losses, and they keep on coming. “I lost 50 thousand”, “ I lost 20 thousand”, “I lost 60 thousand”, and they all end in the same way: “I need to make it back, fast”. Within the context of all of these emails, I get clues as to why so much has been lost and in such a short amount of time, and they can be boiled down into two basic concepts:

1. Overtrading
2. Overleverage

A lot can be said about these two things, and they can be broken down into many separate categories, and we’ll do so later. But for now, these two fundamental factors, and these two alone, are the killers of all killers.

But what causes these two factors to happen in the first place? Why do people naturally gravitate to these suicidal tendencies? It has to do with two things:

1. Factual information / guidance of which we learn
2. Trading Habits

Now here’s the major problem, and it has to do with number 2 on the list above: when we begin our trading careers, we are factually deficient. We lack number one here. In other words, we are poorly informed, have not read enough information, or the right information, in regards to trading, and we have a basic knowledge of what we are doing. We will learn a few particular strategies, open our trading stations, and start to trade it, without barely any other knowledge of the instruments we are trading, what really moves them, or how to handle these trades once we are in them. We have a poor knowledge of the market, and how to trade in general, whether we realize it or not. We are inexperienced.

At this time in the early stages of our trading careers, we are developing, though we don’t realize it, habits. We are incorporating our poor knowledge base into our actions, and subsequently, developing poor trading habits.

Here’s something important to realize:

We can choose to omit factual information from our brains quite easily (trading systems, knowledge of specific currencies, price movement, fundamental facts, etc.) if proven false.

We CANNOT choose to rid ourselves of habits easily at all. Habits are typically a result of subconscious activity, and execution of our habits comes quite easily.

Ask anyone with a bad habit outside of the realm of trading. Many smokers do not wish that they smoked, but they do, because they have developed the habit of doing so. As anyone knows, getting a smoker to quit is like pulling a bad tooth from an angry pitbull. It’s tough.

So what does this mean? Despite all of the information we pick up throughout our trading careers, whether it be on trading technique, fundamentals, technical analysis, etc., we are still subconsciously tied to poor trading habits. So despite our exhausting attempts to learn a better trading technique, learn more about instrument valuation, macroeconomics, etc, they can all be done in vain unless we change our execution habits.

I know a lot of very “smart” analysts who are horrible traders. These guys could talk me around in depth explanations of macroeconomic environments and make me look like a complete idiot while doing so. I used to work with many of them, so I know them very well. But when it comes down to actual trading, I’ll beat them tenfold, because I developed a skill which they find extremely difficult to do, or are too “smart” to realize otherwise, so goes the argument.

Let’s be clear: factual information and trading habits are two completely different things, and they need to be distinguished as such. Factual information is extremely important to have, whether it be in regards to technique, market psychology, fundamentals, etc., and this is learned over time, and evolves over time. Constant learning and acting as an information sponge is crucial to our success, and we need to keep doing it. But more importantly, we need to develop successful trading habits in order to prosper. It’s not an option, it’s a requirement.

The combination of these two things (the right factual information and good trading habits) can evolve someone from a straight loser to a dead on winner, but you need them both. If you ask me what I designate as the “right” information, it has to do with market fads and what ultimately moves price (human intervention and mass buying/selling, i.e. how people will react in various environments).

So how do we change our bad trading habits? Well the first step, like anything else, is to realize that you have it. The next step is to exercise various options that will dig you out of this seemingly endless cycle of losing all the time, and this is where our other two concepts, overtrading, and overleverage, come into play.

Overtrading is a function of haste and poorly planned trades. Overtrading will occur if a trader is on a winning streak and wants to keep on winning, or if a trader is on a losing streak and needs to turn things around. In haste, a trader will just keep on adding poorly planned trades to his mix of positions in hopes of turning an above-average profit, which usually lends him or her into disaster.

Overleverage, as you can imagine, is done in a similar manner. Any rules the trader has learned in terms of risk or money management goes right out the window and he or she will double or triple down on positions in order to make a killing, or just come out of a loser at breakeven. In the process, accounts get drained, and things get ugly. And it’s no wonder why.

If you’re reading this and can relate, I’m not surprised. One look at the statistic mentioned at the beginning of this article and a general summation of all the complaints I read are usually a function of these two things. They, as you can imagine, are poor trading habits, and ones that take all of the hard-earned money from your account and push it into the account of the person on the other side of your trade.

Poor trading habits display a lack of reality, or ignorance thereof. For instance, if you do have good money management habits and exercise proper risk guidelines, but you keep on losing, it’s because you are using a trade entry system which doesn’t work, or holding too much conviction on obvious losers. But for some reason, you stay with it, because you believe that “sticking to a plan” is good. Well you would be right about that, but tossing out a losing trading strategy is just as equally important as exercising good risk. Either way, you’re using a bad system, and it needs to go. You need to change the habit of using this system.

Most traders have a hard time “letting go”, and this is what usually ends them down the path of disaster. Smart traders stick to what works, and do so over the long run. This means letting profits run and cutting losses in a systematic pattern which mathematically works out over time. If the math doesn’t work out, it’s simply not worth doing. You are in the business of trading with the expectation to turn a profit, and if the numbers aren’t realizing this, then something is wrong.

So how do we get out of this destructive cycle? Realizing these pitfalls and correcting them is one of the hardest jobs we have as traders. Experience teaches us otherwise, but there are rarely any shortcuts. I am recommending the three steps below which should be used as a learning process, or better yet, development of good trading habits:

Our first job is to find consistently profitable trading systems and master them. There are literally thousands of them out there with plenty of data to support success under all forms of various market conditions. Find them and stick with them. This is the easy part.

Next, when executing trades, plan them out vigorously. Delve into any relevant information you need in order to make an informed decision, and take only the trades which fit into the framework of your profitable trading strategy. Lack of proper planning or learning to take trades based on weak or fundamentally incorrect information, or worse yet, “hunches”, is a quick path to failure. A lot of independent money gets lost due to a lack of proper planning.

Finally, and most importantly, cut down your intraday trading leverage substantially. And when I say substantially, I mean almost to nothing. Until we learn and develop a solid, consistently profitable trading habit, we want to use very, very small leverage and open seemingly insignificant position sizes. This allows us benefit from two different angles:

1. We have winners and we let them run. Because the money we are trading is “relatively insignificant”, we have no emotional attachment to money gained, as the most it could buy us is a cup of coffee

2. Losers don’t affect us emotionally, either. If we take a loss, it’s about as bad as paying a parking meter for one hour

How is this going to help us? When we have developed a good habit of letting winners run and cutting losers off, we see that over time, we are able to turn a profit, in terms of %, that we are more than happy with. When it comes time to putting on “real” money (bigger positions), you are exercising a good trading habit that has proven to be consistently profitable. Again, we are building a profitable trading habit, nothing more. And don’t use “demo account” money or simulated trading. Nothing hurts more than the loss of real cash, even if it is only one dollar here or there.

Everyone talks about how hard trading is mentally and it’s easy to see why many hedge funds have on-call psychologists to come in and talk to traders. Breaking any destructive cycle is difficult, yet by starting from scratch and “relearning” trading from the beginning we can head towards the most important factor that can lead to success: having good habits. Profits are what we ultimately seek, and the process of doing so has to start somewhere. Erase the board and start from the beginning.

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Showing 20 comments
  • Tracey

    Thanks Steve …. oh so true !!

  • MH

    Brilliant stuff!
    Puts into words the essence of the psychological difficulties of trading.

  • Henrik Soke

    Hi Steve! This is probably one of the best posts I’ve ever read about trading! Thanks!

  • ג'וליאן סונג

    Hi Steve,

    Painful, mirror like article.Truth.
    A must for every trades toolkit

  • Alex

    One of the best analysis of the subject in question. I think it’s a good litmus test: if someone is not capable of understanding the importance of what Steve plainly explained AND acting upon it, then those people do not have the required qualities to become good traders.

  • hunterkillua0

    I can’t help to leave a support here, so damn true….

    Thanks for your hard work Steve

  • Terence

    Wonderful article. I would recommend to all Van Tharp’s book “Trade Your Way to Financial Freedom”, which says that market analysis is only 10-20% max, whilst pyschology is 60%.

  • AlbertJee

    Albert Jee

    Thanks Steve, i appriciate the generous teaching by you, i will assurely contribute to the world when i am successful

  • asri

    Thanks Steve , tho the truth is a lil bit hard to accept … 🙂

  • Anonymous

    Excellent advice, thank you …

  • Anonymous

    Thanks Steve, just this week I am down for 2.5 K for reasons of over trading and this after a year of being very profitable on a demo account. So never under estimate the influence of emotions. I will have to start from scratch again and find my mojo minus the emotions.

  • Anonymous


    I can’t get the sound to work on the videos!!??

  • Uncle David

    Great work on the perception of failed traders. Can I link you in?

  • Guy Woodward

    This is an Awesome Post. So True. This is a must read for every trader. I have printed this out and posted near my pc to remind me each a every day…Its like the Geico Commercial of the stack of Dollar Bills with eyes…This is the money you could have saved if you followed the rules!

  • Anonymous

    thank you so much Steve.the most smart&logic lesson i read till now. thanks again

  • Ramon Testa

    What is in this post can be related to life in general, not just to trading. Great article!

  • changitrader

    Totally agree. Trade small contract sizes such as micro lots to train discipline and test strategies.

  • Gilma

    wow,Steve I met you at the Chris LOri workshop in N.C,and I just wanted to say thank you,by the way I loved this article

  • Anonymous

    Brilliant read and right to the crux of the matter. Will be reading it again…..and again….and again!


    Hi Steve,
    I believe i might have asked this question on another post – but could not find it.
    I find trading in shorter horizons an almost impossible challenge – so this is why i have switched back to very long term trading in FX and Equity markets which seems to work better for me.
    My question to you since you seem to be a very knowledgable day trader – what kind of returns can you reasonably achieve over a consistent long period.
    I.e what has been your track record on average annual returns over your career.
    Its a sincerely curious question, as i have so many friends (mostly academics) that claim that it is impossible to be consistenly profitable day trading..
    Thank you for taking the time to answer my question!

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