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10 myths about forex trading

Jul 17 2017
By
Jonathan Smith

In this article we will present some of the most popular misconceptions regarding trading and more specifically the forex market. They will be presented as statements, which are untrue in our opinion and while most experienced traders will agree with most of them, some may feel controversial. Feel free to comment on the ones, where you think we got it wrong.

 

1. You have to be very smart in order to make money in the Forex market.

 

Given the fact, most traders lose money in the forex market, it is not surprising that this believe exists. Doctors, lawyer, engineers … people, who you would consider to be smart often aren’t good at trading. Why may this be the case? The key realization one needs to make is that trading requires a totally different skill-set than most other activities. The development process in most other fields is fairly straightforward – you learn how to do something, you do it multiple times and you get better at it. This is not the case, when it comes to forex trading.

 

Often times traders repeat the same mistakes over an over again, although they know how things should be done. This is done due to the random nature of short-term results. In essence, you don’t need to be smart to make money in the markets, as this may lead to you doubting your decisions constantly.

 

2. Your entry points are the most important part of your strategy.

Often times when a new trader experiences several loosing trades in a row, they blame their system and go on a quest for a new trading methodology. In doing so, they forget about all the backtesting, the previous positive results and instead focus on the short-term downswing. Frequently hopping between different strategies is one of the worst things a trader can do, as this leads to a never-ending cycle of frustration.

 

A system which only predicts the market move correctly 30% of the time can yield positive results, with proper risk management. This may sound a bit counter-intuitive as people associate winning with being right more often than not. In fact, figuring out the best point to exit the market, after you are already in is probably way more important than deciding when to enter. Factors such as your discipline, mindset and concentration are much more important than “getting it right”.

 

3. You need a lot of capital to be successful in Forex.

Trading has gotten a lot more accessible over the years. You can now open an account for as low as you want, with some brokers, like the FCA-regulated industry pioneers at IG. Once a trader does so he quickly realizes, that if he is willing to place a big order, his account may be wiped out in minutes. This leads to the believe, one needs a lot of capital in order to properly trade the markets.

The truth of the matter is, you have to adjust your expectations to the size of your account. If you are planning on becoming a millionaire, after investing $1,000, you will most likely not succeed. If you are a consistent trader, but don’t have the appropriate capital to live of your profit, maybe you should check out social trading services, like Zulutrade or MyFxBook’s Autotrade

 

4. Forex trading is gambling.          

Most people loose money gambling and most people loose money when trading, so It is fairly easy to make this comparison. The fact you don’t control the outcome of every one trade, the same way you don’t control of every bet also helps. The key difference comes from the fact you can manage your risk to reward ratio in trading, unlike at a casino.

Successful traders, in essence, operate similarly to the way the house does – they only enter trades, in which they have the edge against the market.

 

 

5. Spread is the most important factor, when comparing Forex brokers.

 

As you may know, there are many foex brokers out there. When choosing whose services to use, traders often only compare the spreads. As we keep mentioning in all of our reviews, this is not as important as other factors, such as where the broker is regulated and the overall reputation of the company

 

Would you prefer to trade with an unregulated, off-shore company, offering a 1 pip average spread on EUR/USD or a broker, regulated by the Australian Securities and Exchange Commission (ASIC), for instance, which provides a 1.5 pip spread? Hopefully you chose the latter, as there is no guarantee, you will ever get your money back with the former.

 

6. You need to follow the Forex markets 24/5.

This myth comes from the fact, the forex market doesn’t close, except for the weekend. Of course, this does not imply you must trade all the time. If you leave your positions open overnight, you are taking some risk, but you should have no fear, as long as you have placed a stop-loss order. Nobody has the time to constantly follow the currency market. That being said, you should focus on the times of day, when news releases often occur, like the beginning and ending of the European and US sessions.

 

7. The Forex market is rigged.

People often assume this, after looking at the number of loosing traders and who the major players in the forex market are – the banks. In reality, trading is one of the most difficult ways to consistently make money, but this is not due to any master conspiracy against you, the retail trader. Banks, in fact, often have loosing quarters, when it comes to their trading desks. However, the big players can easily write-off several billion. One of the keys to successful trading is trading with amounts you can easily “write-off”.

 

On the other hand dishonest brokers can rig the markets against their clients. One of the ways, in which they do this is via “stop-hunting” - creating a false market move, which triggers your stop loss order. However, this does not mean you should trade without a stop, as this is one of the biggest mistakes. If you often get stopped-out by spikes, which don’t exist in other brokers’ charts, you should consider changing the company you trade with.

 

8. The more you trade, the more likely you are to win.

This misconception may be a bit harder to disprove, as it comes from a very logical perspective. If you trade a strategy, which has a positive expectancy, you should trade it, whenever the set-up occurs, right? This logic is true, only if no human factor is involved. 

Lets’ take a look at a classic example, which is often used to illustrate a different point: If we start flipping a coin, and every time it lands on heads, I have to pay you three dollars, while every time it lands on tails, you have to pay me one dollar, you would be incentivized to play as often as you can. However, would you be willing to continue playing if you are so tired you can not see the coin, as it falls? Or if you can’t be certain if the coin has two sides at? Or if I am the only one throwing it, and I use a particular technique?

The analogy may not be the best, but the point is that over-trading can get you in trouble. While beginners may benefit from looking at the charts for a prolonged period of time, just to get a feeling of how the market reacts, this doesn’t mean they should constantly trade. Automating your strategy can be one of the ways to get around this issue. 

 

9. You can get rich quickly, by trading Forex.

The popularity which forex trading has gained over the years, has led to the development of another industry – the “forex guru” industry. There are dozens upon dozens of educational websites, claiming access to their great systems which keeps producing amazing results. They create the feeling you can “beat the market” … only if you follow their strategy. While their marketing materials are often times overstating the true nature of what you will receive if you decide to follow them, they also create the illusion that making money in the forex market is easy. This can not be further away from the truth. Most of these “gurus” will not teach you anything a free on-line source will.

10. There is a "Holy grail" system out there.

This goes in tandem with a lot of the previous points. Some new traders believe there must be a way to trade nearly perfectly and produce amazing results. All you have to do is find the “Holy grail” system. While trading with the proper strategy is a necessity for getting consistent results, there are no “shortcuts”, like a simple set of rules, which will guarantee solid gains. If you are trading a system which has positive results over multiple months and you can sleep at night, you are have the “Holy grail”.

TAGS: forex  myths  misconceptions  trading  10   
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