Why most people lose money in the forex market

A friend of mine volunteers on a regular basis to rid his



neighborhood of rodents and animal riff-raff: the woodchucks,


groundhogs, and possums that eat up gardens, attack family pets,


and so on. He sets a trap with ripe fruit or tuna fish. The animal


enters the trap for the food. If the animal can’t find its way out,


it is eventually shot and buried.


In the forex market, sometimes you get the fruit.


Sometimes you get trapped and shot. Why?
Possums are relatively easy to catch. They



go for the fruit, they get caught, and then,


when the trapper approaches the trap, the


possum simply plays dead. It plays dead


because that’s the best defense mechanism


that it has.


A woodchuck is tougher to trap. A big


one might enter the trap, eat the fruit, and


then rip the trap apart, exit, and wander off


looking for more food. Or it might roll the


trap along the ground, set it off, and then


eat the fruit from the outside.


There is a fundamental characteristic of


unsuccessful forex traders: they trade forex


because it’s exciting, cool, or for its sex


appeal. The mystery behind the charts, the


notion that profits (although elusive) do


really exist, and that money can be made


quickly (but not predictably) all add up to


create a romantic fantasy that is too


appealing to avoid. When they start to lose


money, they leave their positions open,


close their eyes, and hope that the trap is


miraculously opened so they can be free


again.


This group – the Possums – is the largest


block of forex traders.


There is also a fundamental characteristic


of successful forex traders. They trade


forex because it makes them rich. They


trade because they know how to do it. They


do not trade for fun. Many of them are


unimpressed by their own success.


Most of them never share their secrets


with anyone. They take a methodical,


almost boring, approach to forex trading.


They painstakingly build systems that,


although simple, may have taken years to


perfect. In the end, their lives are actually


quite boring – reduced to waiting for


predictable signals that are obeyed without


question.


This group – the Woodchucks – is the


smaller of the two groups. The Possums


outnumber the Woodchucks by a ratio of at


least 500:1. For every Woodchuck, there


are 500 Possums.


Are you a Woodchuck or a Possum?


Possums don’t want to learn the


intricacies of the forex market – the charts,


the signals, the nuts and bolts – because


they are afraid that once known, all these


details will ruin the romanticism of the


entire adventure. The mystery, the elusive


profits, the unknown, all contribute to


create an excitement that would be lost if


too much were discovered. Searching for


King Tut or the Titanic was big news.


Finding both was big news. When’s the last


time you heard about either? Once found,


the mystery was solved and the public went


on to other mysteries.
Woodchucks want to learn the market.



They want to know what signals are most


predictive. They want to know everything


they can not only about spot trading, but


about their broker, their broker’s practices,


the governments involved in currency


movement, interest rate changes, and the list


goes on and on. Woodchucks want to know


as much as they can. It might destroy the


mystery, but they’re not in the forex market


for adventure. They’re in it for profit.


There is a myth in American culture, and


it’s spreading around the world: your job


should be fun. You should enjoy what you


do for a living. “Do what you love and the


money will follow.” And so on. Perhaps


we’ve had too strong of a dose of this


doctrine. The truth is that although we are


better off choosing a career that interests us,


we’re going to be bored at work if we learn


our job really well. The promise is simple: if


you become a world-class forex trader, at


some point your job will be ho-hum. Not


all the time, but it’s not going to be an


adventure every day of the week. Sorry.


On the other hand, consider that


successful forex traders are some of the


most highly paid professionals in the


world. If you pay them by the hour, they


make thousands and thousands of dollars


for every 60 minute period they spend


working. Some of them only trade for a


half day. Some trade for 20 hours a day.


Their jobs aren’t always fun, but they do


make a lot of money.


Why be a Woodchuck?


Simply put, if you want to survive, then you


need to start thinking like a Woodchuck. If


you want to make money, you need to


commit yourself to freeing yourself from


the trap and getting the fruit. Or, more


importantly, finding a way to eat the fruit


without ever entering the trap in the first


place. And therein lies the secret. We’re all


going to get trapped from time to time, but


we have a choice of whether to free


ourselves or lay down and let the trapper


shoot us.


I learned my lesson early in my career as a


forex trader. Although I had spent four


months creating a trading strategy and


system, I occasionally really, really wanted the


fruit, so to speak. At those times, when I


should have stayed on the sidelines of the


market, I would enter trades based on


rumor, speculation, or even well-informed


opinions – instead of my tried and tested


strategy. In other words, I would enter the


trap and start eating the fruit, thinking that I


could get out of the trap without setting it


off.
how to discover tru principles
1. Find a system to test. Lots of traders use moving averages – when the



moving averages cross each other, they give off buy/sell signals. The


might read candlestick patterns, Elliot Waves, or Fibonacci Arcs. Find a


system that you like and test it. Get charting software that allows you to


backtest your results. AmiBroker and TradeStation both work well.


2. Play with the variables. If someone’s system says to use the 5 and 13


Exponential Moving Averages, then try the 4 and 9 instead. Then add in the


MACD or the CCI or the RSI and look for candlestick patterns. Backtest these


new variables. Are the new ones more profitable?


3. Keep notes of the results. Keeping notes in a trading journal or notebook is


essential. Are you recognizing any patterns (e.g., Fridays are bad days for


your strategy, or the 5 and 13 work well if you wait for a -.0004 MACD?


4. Draw preliminary conclusions. Once you’ve done your testing, write out the


principles that you’ve discovered. Then test the principles with a demo


account for at least 4 months -- did your system work? If so, set it in stone.
Well, the last time I made this mistake, I



entered a trade that lost 250 pips in 72


hours. I stayed in the trade hoping that the


market would rebound (it never did). I


figured if I just laid down quietly, the


trapper would never come and shoot me.


Well, he did. I lost my usable margin on the


last day. I lost 75% of my account.


I resolved on that day to never again


violate the principles of my trading strategy.


I tell everyone that trades forex the same


thing: you can learn this the hard way, or the


easy way. But you will learn it eventually: in


the world of forex trading, there are only


Woodchucks and Possums. If you’re just


trading on emotion, speculation, or


excitement, then you’re a Possum, and


you’re going to get shot. Either take it from


me, or learn on your own. I hope you take


the time to read the principles below and


learn from my mistakes.


How to Be a Woodchuck


There are five steps to thinking like a


Woodchuck in the forex market.


1: Be hungry and determined


The Woodchuck wants the fruit. He


believes that he has a right to it. He is
willing to do whatever it takes to safely get it



and eat it.


As for you, you’ve got to want profits.


You’ve got to put profits ahead of


everything else. You’ve got to say to


yourself that the most important thing at the


end of the money is not making lots of


trades, or any trades, but rather the most


important thing is to end the money higher


than when you started it. This belief has to


drive you. If you trade because you like to


trade, you’re going to lose money – you will


end up making stupid trades, getting


trapped, and laying down to wait for the


bullet.


The Woodchuck wants to fill his belly –


but not at the expense of his life.


Remember that.


Be hungry for profits, not just for trades.


2: Discover true principles


The Woodchuck, unlike the Possum, can


learn from its own mistakes or the mistakes


of other animals. It understands that if it


enters the trap, it will be caught. It knocks


over the cage, sets it off, and then jumps


back. When it senses the danger has passed,


it might start poking at the cage from the


outside, or try to grab the fruit through the


bars of the cage.


Likewise, you need to become a student


of the forex market if you want to become


successful. The forex market does not


reward lazy people. Plan on spending some


money on books to become familiar with


charting patterns. Read everything you can


online about how the market works. Get


some charting software – there is plenty of


good free charting software to start you out


– and watch the formations. Most


important, start trading on a demo account


immediately. Get involved, take notes.


Keep a trading journal that lists every trade


and the reason you entered and exited.


As you do these things, you will distill


principles of the forex market. From the


jumbled mess of data, patterns will emerge.


Effective trading strategies will become


apparent. Profits will still be elusive, but


you will begin to learn true principles of


trading. Write these principles down as you


learn them. They will serve you well later.


3: Obey true principles


Once you discover a set of true principles,


they’ll do you no good if you disregard


them. I’ve met forex traders that


understood many, many true principles, but


they were still dumb as a bag of hammers
and poor as church mice because they



failed to obey them.


Our culture isn’t much fascinated with


obedience – if you’ve noticed, we’re all


about how free we are, how unrestricted our


behavior can and should be, and so on.


This booklet isn’t a commentary on social


issues, but I do want to advise you that


sticking to your principles may seem odd at


first.


You might determine that although


important, your principles are more


“guidelines” than hard and fast rules. Don’t


fall for that! Don’t spend all your time


discovering true principles just so that you


can violate them – and lose a lot of money


in the process.


Once you discover what works, stick to


the plan!


Mark Twain said that once he learned all


of the intricacies involved in navigating the


Mississippi – the steering of the boat, the


reading of the compass, the charting of the


deep and shallow points – that the river lost


its beauty.


That’s a lesson, a truth, that you’re going


to have to become comfortable with. At


some point, when you develop a profitable


trading system, the system will return profits


if you’re awake, asleep, playing football with


your kids, or if you get hit by a bus. The


system will be tweaked from time to time,


of course, but it will work. Your hard work


will pay off. But the mystery of the forex
all about woodchucks
The woodchuck circles the trap many times, and from all



angles before deciding how he is going to get the fruit.


Sometimes he will wait till another animal is in the trap,


then pick the fruit through the wire cage. Woodchucks


know their capabilities. They pal around with others in


their den and know when one does not come home.


They search for the scent of their own, and hear the cry of


the one that is trapped. The big, old woodchucks learn


from others mistakes and do not make the same mistake


themselves. They are not paralyzed in fear, but


cautiously optimistic, ever searching for the food they


want, but holding onto true principles that have kept them


alive. Big, old woodchucks will at times walk away from a


trap because the lure of the fruit is not worth the work it


will take to get out of the trap before the hunter kills him.


- Terry Larsen, Neigborhood Pest Control Expert
market will disappear for a time, maybe



even forever, and thus your fascination with


it might wear off too.


This is why many forex traders, although


they have learned true principles, are still


losing money as fast as they can trade. They


want to chase the mystery of the market.


They enter the cage to get the fruit because


that’s more exciting. It’s also more


dangerous. Even fatal.


4: Know your limits


One mistake Possums make is that they


never set limits. They’ll waltz into the cage


and go for the fruit with reckless abandon.


You might attribute this to stupidity, and


you may be right. But it also might be due


to their over-exuberance. Their inability to


contain their excitement over finding some


fruit.


You will be tempted to snatch the fruit


as soon as you can see it. You might be


tempted to violate your principles when you


see the market take a big swing, or after


Alan Greenspan says something on


television, or the latest job report comes


out. Sometimes, you’ll be tempted to set


your stop-loss very widely (thus risking the


loss of a lot of money) or to not set a stoploss


at all.


In order to succeed, you must set stops.


You have to be able to tell yourself that it’s


time to get out of the market, that you’ve


tried to get the fruit – but that today it’s just


not going to work. Perhaps your system


works 80% of the time, and this time your


system has simply failed.


Getting out of the market at the right


time is just as important as getting in at the


right time. If your system tends to return 20


pips per trade, then set your stop-loss so


that you don’t lose more than you can


possibly gain.


If you disobey your principles, and you


find that you’re in a big, big losing trade,


then look at your trading system: do you


really see the market coming back to breakeven


anytime soon? If not, then get out. If


so, then stay in – if you have the usable


margin to withstand some heavy losses.


Which brings me to my next point: don’t


trade huge chunks of your account. If you


have a $1,000 account, then don’t make


trades that require you to put up more than


$100. Also, don’t make trades that can lose


or gain more than $3 per pip. If the market


takes a real nosedive against you, you could


halve your equity before you realize what


you’ve done.
5: Back off when necessary



If you lose a lot of money in one day, or


gain a lot of money in one day, back off


from the market. These are dangerous


times. I talk about Pride, Fear, Greed, and


Revenge in my Strategy:10 booklet (free, on


my site) but it will help to summarize the


main points here too.


Pride is your worst enemy. There is no


such thing as “good pride” in the forex


market. As soon as you become proud of


your success, you’re headed for a fall. When


you’re prideful, you leave yourself open to


Greed and Revenge. You feel that you


deserve more profit, are willing to take more


(unwise) risks, and you strike back at the


market when it beats you. Being prideful in


the forex market is acting the same as the


Possum who believes he can go into the


cage, get the fruit, and still get out. It won’t


work. Keep your pride in check.


Next, watch out for Fear. When you’re


afraid, you make poor choices – you’ll exit a


trade before it becomes profitable or you’ll


enter no trades at all. If you give in to fear,


then back off the market. Backtest your


system again. Review what made you


successful in the past. Take a day off and


reset your bearings. You’ll feel better and


be ready to trade the next day.


Greed is perhaps the second worst


emotion you can ever feel in the forex


market. This emotion will convince you to


set higher limits and wider stops, leaving


you exposed to the wild swings of the


market. Greed is what convinces you to


leave a position open for one more pip of


profit – when the market is about to slide in


the opposite direction and take your entire


profit with it. Don’t give into greed. If you


lose a bunch of money because of greed –


or make a bunch of it – then take the next


day off. Watch the market. Demo trade for


that day. See how you fare. Then get back


in the next day when you’re ready to stick to


your principles.


Revenge is the most dangerous emotion


of all. When you lose money, you will


always feel the temptation to strike back at


the market (out of pride). You’ll say to


yourself that you deserve to get your money


back. This might even work temporarily.


But this will catch up with you, as you seek


out trades for the sake of trading rather than


for the sake of making money safely. If you


feel revenge coming on, get out of the


market. Take a seat. Review your system.


Even if you lose almost all of your money,


you can gain it back systematically. You will


never get it back by seeking revenge on the


market. A Possum in a cage might seek


revenge against the trapper, but we all know


how futile that is.
Conclusion
You can succeed in the forex market.



As a day trader, you can be paid more handsomely than


doctors, lawyers, and just about everyone else. But if you


want to be a member of the elite class of highly successful


forex traders, then you have to put the time in. You can’t


expect profits to come easily.


Successful forex trading will offer you more time, more


money – and more stress – than you have probably ever


experienced. But you can do it. Success is not about your IQ


– it’s about your work ethic and your discipline. It’s about


your ability to stay out of the trap, not set off the land mines,


or just simply get out of the market when it’s time.