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Understanding Losses in Forex Trading

It is estimated that of every 20 investors, only one makes profits in forex trading, while the remaining 19 suffer a forex loss

It is estimated that of every 20 investors, only one makes profits in forex trading, while the remaining 19 suffer a forex loss. This means that only 5% can make profits consistently, while a majority of investors lose money. Some people claim that making profits in forex trading is sheer luck because of the volatility in the market, which makes it difficult to make predictions.

This, however, is not true, as many investors have consistently made profits. This points to some objective reason behind making profits and facing a forex loss.

In the forex market, trades are made in pairs i.e., one currency is exchanged for another—for instance, the Great Britain Pound (GBP) against the Swiss Franc (CHF).

When traders buy GBP using CHF, they are doing so hoping that the value of GBP increases and that of CHF declines. Contrarily, when they sell GBP in exchange for CHF, they expect GBP to decrease in value and CHF to increase. If you buy GBP for CHF, but the Swiss Franc increases in value, you will be faced with a forex loss, as you are left with Pounds that are lower in value vis-à-vis Francs as compared to when you made your purchase.

Tips to Avoid Losses in Forex Trading

You should predefine your exit positions to minimize losses, to prepare for scenarios when trade does not follow your expectations. You can choose to leave an order with your broker, and if the order meets the parameter, it will get executed automatically.

So, traders have a choice of how much loss they can bear before they exit their positions. Such an order is called a stop loss order, which is widely used as a risk management tool. If an investor does not leave a stop loss order and the position moves against his trade, he will lose even more money if he has a leveraged position.

Forex trading losses can be avoided by learning a little about the forex market, treading carefully in the initial stages, and getting some experience of different situations.

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