Whether you're a seasoned trader or new to the forex market, the myths about forex trading are always swirling around you. These erroneous ideas can potentially affect anyone, no matter how long they have been trading. By knowing some of the major misconceptions, traders can avoid unnecessary frustrations.
We'll look at 10 trading myths that come up often and affect every stage of the practice—from why people get involved in forex to developing strategies.
1. Get Rich Quick
Advertising has rapidly expanded the foreign exchange retail market. This has brought many people into the arena who are on a quest to get rich quickly (or with little effort). This unfortunately is very rare indeed. Trading takes patience and there is no final destination. Traders do not make some money and then walk away; rather they make trade after trade, even if there are time gaps in between. Therefore trading requires consistency, not a gambling-like, throw-it-all-at-a-couple-trades mentality.
2. Forex Is Just for Short-Term Traders
High leverage has made short-term forex trading popular, but this is not the way it has to be. Long-term currency trends are driven by fundamental factors, and these long-term trends are tradable. Long-term traders focus on the larger trend and are not concerned with everyday gyrations.
It is arguable that taking a longer-term time frame may be beneficial to some traders as it will reduce the number of spreads paid (the equivalent of a commission) and traders are more likely to avoid short-term impulse trades.
Currencies can also be used as an investment to diversify or hedge buy-and-hold portfolios.
3. The Market Is Rigged
Losing traders often point to a rigged market or a corrupt broker as the reason for their failure. While it is an easy assumption to make, forex is not a scam. Sure, fraud does occur—but that doesn't mean the market itself is illegitam.
In fact, the forex market is by far the largest in the world swayed by hundreds of thousands of transactions and potentially thousands of inputs each day. That makes it likely that if someone takes a non-businesslike approach to their trading, one of the other savvy participants will usually quickly notice; this is the way of all markets.
4. You Can Be Right Every Time
Losses occur, and attempting to find a strategy that is right every time will either leave the trader on the sidelines indefinitely or will bring the trader into the market with an over-optimized strategy that will not adapt to new conditions. Accepting that losses occur and finding a strategy that gives a slight edge in the market conditions that are traded is enough bring in positive returns.
5. You Can Make Money Trading News
In hindsight, seeing a move in currency after a high-impact news announcement like the U.S. Nonfarm Payrolls (NFP) Report can make people salivate with thoughts of quick money. Unfortunately, news events can be extremely hard to trade in real-time. What the charts generally don't show is that often there is no liquidity for much of the movement that takes place in the first few seconds after the announcement, meaning traders cannot get into a favorable move once it starts, or get out of a losing trade once they are in it.
Although it is possible to set up a trade before an announcement is made, execution requires analysis of the presented statistics in order to determine the likely effect on the market. This analysis must be conducted almost immediately as other traders are gauging the same indicators. Therefore, trading news takes a meticulous strategy, and consistently easy money is rarely found.
6. The More Trades the Better
While it would be nice to think that if a trader makes money trading once per day, they can make 10 times as much trading 10 times a day, this is generally not the case. Trading less and focusing on a few currency pairs that the trader understands will be beneficial to most traders. Unless a trader is skilled and focuses on scalping strategies, the majority of traders will benefit from being patient, focusing on something they know and waiting for the best opportunities—few as they may be.
7. You Can Predict the Market
Attempting to predict can be the downfall of a trader, although it is what most novices attempt to do. Predicting can blind us, as it causes a psychological bias towards a position and can disrupt our rational judgment. Traders must be nimble, trade according to a system, and take the losing trades with the winning ones.
The market, which is constantly moving, should dictate the trades that are made. If a prediction is made, the trader should wait for the movement of the currency to confirm that the prediction is right.
8. The More Complex the Strategy the Better
Traders often begin with a simple strategy and see a small return. They then assume that if they continue to tweak their system, taking into account a few more variables, that they will increase their returns. This is not usually the case.
Instead of looking at simple things such as price movement (which is the final determinate in making a profit) and whether the market is trending or ranging, the trader attempts to determine exact reversal points and make more trades.
Trading profits are made at the margin; even the best traders only win slightly more than they lose. Therefore, if a system makes money, stick with it and don't change it; focus on money management instead.
9. Money Management Just Means Stopping
Money management (MM) is arguably the most important factor in determining success once the trader has developed some skill in getting consistent returns. MM is not simply placing a stop order on a trade; rather it encompasses how much of the total account will be risked on each trade (generally, less than 1%). It will also look at:
- How many trades can be open at a single time
- If multiple positions are open, do they need to hedge each other or can they be highly correlated?
By focusing on money management a trader takes their trading to next level. Ignoring money management means imminent failure, even with the best strategy.
10. Just Follow What Others Are Doing
There is always lots of advice swirling around on how to trade, what to trade, and when to trade. Yet ultimately it is the trader whose money is at stake, and who will be the sole recipient of profits and losses. Therefore, traders should make every attempt to develop their own skills and come to their own conclusions instead of purely relying on the advice of others.
Experienced professionals can greatly aid new (or other experienced) traders, but all information should be filtered and scrutinized before the information is acted on. No one else has a vested interest in the profitability of the account like its trader; therefore the trader of the account should provide the largest input.
The Bottom Line
It is important for a trader to do their research and understand what currency trading actually involves; some of this will come from experience, which is why money management is so important, and some of it will come from educating one's self.
The currency markets are full of myths that can harm a trader's chances at success or can lead her astray. Develop a solid trading plan that is personally tested and take full responsibility for the success or failure of that plan; in this way, the effects of the myths will be diminished or discarded altogether.