February 9, 2024
Trading might seem complicated and mysterious to beginners. Many myths about trading make it even harder for new traders to understand how it works.
Some people think you need to be an expert in economics and finance to succeed in trading. While knowing these subjects can help, trading success is more than just that. Being able to control your emotions, especially when the market is unpredictable, is just as important.
Trading is complex and requires much time, effort, and discipline to get good at it. Successful traders often spend years learning about the markets, creating their strategies, and improving their skills. Trading comes with risks, and it’s possible to lose money by making common mistakes. So, it takes a lot of work to make money but a long-term commitment to learning and growing in a challenging area.
We’ll look into some common myths about trading and explain why they don’t hold up.
10 Common Myths about Forex Trading
The myths surrounding forex trading can impact traders at any level of experience. Understanding these common misconceptions can help traders steer clear of needless frustrations. Several myths frequently influence all aspects of forex trading, from the reasons people start trading to how they develop their strategies.
Let’s explore some of these myths.
1. Get Rich Quickly
Fueled by aggressive advertising, the allure of fast wealth has drawn many to the forex market. However, achieving quick riches in trading is exceptionally rare.
Trading demands patience and doesn’t have a finish line; traders don’t just earn some money and stop. Instead, they continue making trades over time, maintaining consistency rather than adopting a gamble-like approach of risking everything on a few trades.
Success in trading comes from steady effort rather than luck or minimal effort.
2. Forex Is Only for Short-Term Traders
The availability of high leverage has popularized short-term forex trading, but forex isn’t limited to just that. Fundamental factors drive long-term currency trends, which can also be traded.
Long-term traders tap into these more significant trends, paying less attention to daily market changes. Adopting a long-term perspective may benefit some traders by reducing the costs associated with spreads (similar to commissions) and helping them steer clear of impulsive, short-term trading decisions.
Furthermore, currencies can serve as a way to diversify or hedge against risks in buy-and-hold investment portfolios, showing the versatility of forex beyond just short-term trading.
3. The Market is Rigged
Some traders who lose often blame their failures on a rigged market or dishonest brokers. Though it’s a common excuse, it’s inaccurate to say the forex market is a scam. Yes, there are instances of fraud, but that doesn’t make the market itself illegitimate.
The forex market is the largest financial market globally, influenced by hundreds of thousands of transactions and thousands of factors daily. It’s highly competitive and transparent, meaning that more experienced market participants will likely capitalize on their mistakes if a trader doesn’t approach trading seriously. This competitiveness ensures that single entities or groups do not easily manipulate the market.
4. You Can Always Be Right
Experiencing losses is a part of trading. Trying to develop a foolproof strategy that guarantees success every time is unrealistic. Such an endeavor can result in a trader never entering the market for fear of losing or employing an overly complex strategy that can’t adapt to changing market conditions.
It’s crucial to accept that losses are a part of trading. The goal should be to find a strategy that provides a slight advantage in the prevailing market conditions, sufficient to yield positive returns over time.
5. It’s Easy Trading News
It might seem tempting to make quick profits by trading on major news events, like the U.S. Nonfarm Payrolls (NFP) Report, especially when currency prices move sharply after such announcements.
However, trading based on real-time news events takes a lot of work. The charts sometimes show that, right after these announcements, the market can become illiquid for a short period.
This lack of liquidity means traders might be unable to enter a trade at a reasonable price once the movement starts or exit a losing position.
Setting up trades before news announcements is feasible, but it demands fast and precise analysis to forecast the market impact of the news. It would help to act fast because you’re competing with other traders analyzing the same data. Therefore, news trading involves a carefully planned strategy; consistently earning easy money from it is uncommon.
6. More Trade Brings More Profits
A common misconception exists that more trading leads to more profits. For instance, if trading once daily results in a guaranteed profit, many believe that trading ten times daily should yield ten times the profit.
However, this is usually different from how trading works.
Trading less frequently but with a deeper understanding of a few currency pairs often proves more beneficial. Most traders, except those focusing on very short-term strategies like scalping, find greater profitability in patience, concentrating on familiar markets, and waiting for the best trading opportunities, which may not come around often.
7. It’s Easy to Predict the Market
Believing you can predict the market is a common mistake, especially among beginners. Trying to forecast market movements can lead to a dangerous bias toward a particular trading position and cloud your judgment. Instead, traders should remain flexible, follow a systematic approach, and be prepared to accept losses and wins.
The market’s ever-changing nature should guide your trading decisions. If you make a prediction, waiting for the market to move in the expected direction to confirm your hypothesis before acting on it is essential.
8. Complex Strategies Bring Better Profits
Many traders start with a straightforward strategy and, upon seeing modest gains, believe that adding more complexity and considering more factors will increase their profits. This approach often doesn’t lead to better results.
Focusing on fundamental aspects, such as price movement (which ultimately determines profit) and identifying if the market is trending or ranging, is more beneficial than pinpointing the exact moment the market will turn.
Remember, trading profits are usually slim— even the most successful traders have a win rate only slightly above their loss rate. If you have a strategy that works, it’s better to stick with it and concentrate on managing your money well instead of continually adjusting your strategy in search of more significant gains.
9. Money Management Means Putting a Stop Order
Money management (MM) is crucial for trading success, especially once a trader sees consistent returns. It’s not just about setting stop-loss orders to limit potential losses. MM involves deciding how much of your total account to risk on each trade—usually less than 1%. It also includes strategies like:
- Determining the maximum number of open trades at any one time.
- Deciding whether multiple open positions should hedge against each other or if they can afford to be closely correlated.
Focusing on effective money management can elevate a trader’s performance significantly. Neglecting MM almost guarantees failure, regardless of how good a trading strategy may be.
10. Do the Same as Everyone Else
In the trading world, you’ll find plenty of advice about what and when to trade. However, it’s your money that’s on the line, and you’ll be the one to bear the profits or losses. Therefore, traders must develop their trading skills and judgments rather than solely depending on others’ advice.
While experienced traders can offer valuable insights, it’s important to critically evaluate and personalize this advice to fit your trading style and goals.
Remember, no one else has as much to gain or lose from your trading decisions as you do. Thus, the person with the most influence over a trading account should be the one who owns it.
Empowering Your Forex Trading Journey with Knowledge and Strategy
For anyone starting in currency trading, it’s important to understand what it involves. Practical experience is key, so start with good money management. Keep learning to improve your skills and avoid common myths.
The currency market has many misleading myths. The solution? Create a solid trading plan based on your style and goals. Take responsibility for your trades and learn from both successes and failures.
Forex trading takes time and dedication. Stay patient, question myths, and stay focused on your goals. With knowledge and planning, you can succeed in the forex market.