There are numerous misconceptions and incorrect assumptions that surrounding trading. These myths are held both by aspiring traders as well as the public. Not only are they untrue, they are hurtful both to you as a trader and your chances off success but also to the reputation of trading in the minds of the public who know next to nothing about it.
In this article, we are going to dispel 11 of the most common myths of trading and explain to you why they are not true…
Hopefully, after finishing today’s lesson, you will have a better understanding of the reality of trading, what to expect and how to profit from it. Each trading myth will be followed by the truth and an explanation of both:
The Myths of Trading:
Myth: Trading is all about making that fast-cash man!
Truth: Trading is about not losing money, you must learn to do that if you want to make any…
Perhaps the biggest myth about trading in the general public’s mind, is that it’s all about making money fast. High risk, fast money, fast cars, etc. etc. The stereotypes that surround trading are so widespread that most beginning traders get into trading due to these stereotypes and so they start off with the complete wrong mindset and expectations. These expectations come to a crashing realization once they lose a few trades and reality sets in. As the great Warren Buffet so famously said:
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. – Warren Buffett
That’s right, trading is about not losing money much more than it is about making it. The reason is, if you want to make money in the markets, you must be a risk manager more than anything, a capital preservationist, if you will. If you want to take advantage of big moves in the market, you’ve got to learn to preserve your trading capital by bidding your time and being patient in the face of constant temptation.
You will be in battle not only against all other traders trading the markets you look at, but also against yourself, which is perhaps the hardest ‘opponent’ to defeat. Once you get to the point where you can preserve your trading capital and only use it on trading opportunities that meet your strict, pre-defined criteria laid out in your trading plan, then you will have conquered yourself and you will start taking money from other market participants rather than giving it to them.
Myth: You need to be an Ivy-League, Wall Street hotshot to make it as a trader
Truth: You don’t need to be super smart, trading is as much skill as it is math…
Guess what? You don’t need to be a college graduate to be a successful trader. Trading isn’t only for some super-genius math wiz who sits there coding algorithms all day. In fact, just like being overly-emotional can be bad for trading so can being overly-analytical. Those who are too analytical tend to over-think and think themselves right out of perfectly good trading opportunities.
Ideally, you want to have a good mix of gut feel and analytical trading abilities. Your gut feel will give you many trading ideas and the desire to take them but your analytical /forward thinking abilities will be the check that keeps your trading in balance. Only when a trade idea passes both your gut feel and your logical, objective analysis should you consider entering it.
The point of the matter is that college degrees, IQ’s and other ‘credentials’ are nothing but background noise to the market. Those who succeed at trading are masters of themselves. Master your own actions and behavior and ability to control them and you will succeed at trading. All the books and an IQ of 180 won’t do you any good if you over-trade or risk too much or cannot remain disciplined.
Myth: You must have perfect timing to make money in the markets to pick highs and lows exactly
Truth: Trading is not about picking the highs and lows, it’s about reading the charts from right to left…
You don’t have to pick exact market turning points to make money trading like many people think. You do have to read the chart, the story on the chart and understand what it’s trying to tell you. You then look for price action signals that ‘make sense’ with that chart’s story.
In this recent Gold chart, we can see that the story on the chart was this:
An uptrend was in place on the daily chart as seen below. Then, we drew in the key horizontal levels of support to look for signals at. Then, price pulled back to support and formed an obvious pin bar reversal signal there, indicating a long entry was appropriate. You can see what happened next. We are reading the chart and considering the context a potential trade entry forms within, not just trying to pick the exact high or low with no rhyme or reason.
Myth: You need a lot of money to stand any chance at making money in the market
Truth: You don’t have to have a lot of money to start, a good trader can make money regardless of account size…
Often, traders believe that to succeed at trading they need a big trading account. But, this is simply not true. IN fact, you can lose money on a big trading account just as fast as you can on a small trading account. It’s best to start with a smaller account even if you have a lot of money to trade with. Will a large trading capital reserve allow you to make more money faster? Sure. But, fi you don’t know what you’re doing you can also lose that money faster.
The strategies, skills and mental attitudes you need to succeed at trading will work on a small account the same as a big account. It’s always best to start on a small account and hone your skills, then when you’re ready you can deposit more money if you have it or just keep building that small account.
Don’t be in a rush! If you build a track record of successful trading on a live account, even a small one, you will be a successful trader. Building a successful live account track record over a period of a year or more is something that FEW people can do. If you do that, even on a small account, your success will start to snowball.
Myth: You have to know what is going to happen next in a market to make money.
Truth: You don’t have to be right or know what will happen next to make money, you must understand that you can never know for sure what will happen…
One huge myth about trading is that to make money you must know what will happen next. This couldn’t be further from the truth and in fact, it’s not even possible. Part of trading is that there is a random expectation for any one trade you take. Meaning, any individual trade, looked at in a vacuum, so to speak, has essentially a random outcome. This is because there are thousands, maybe even millions of variables affecting a market at any given day at any given time. As a result, a trade really can go either direction, even if you believe you are 100% right about it.
Where your trading strategy or trading edge comes in, is that over-time, given enough trades, if you follow your strategy with discipline, it will play out in your favor. Most trading edges or strategies are simply taking advantage of repetitive market patterns or price action patterns that form because of repetitive human interactions with the market. So, whilst your trading edge might have 60%-win rate, any singular trade has essentially a 50/50 chance of working out. So, don’t start convincing yourself “I’M RIGHT!” about your next trade because you’ll start risking too much and getting too emotionally attached to that trade, which is a recipe for disaster.
Instead, realize and understand that there is something called a random distribution of wins and losses, which essentially means what I described above. For any given trading edge or strategy, over time and over a large enough sample size of trades, that trading edge will show a randomly distributed pattern of wins and losses. So, whilst you do need confidence in your trading ability and chart reading skills, you cannot afford to becoming convinced you are ‘right’ about any one trade and you must always remember that ANY trade can be a loser. For more on this topic, checkout my article on trading legend Mark Douglas.
Myth: You need a high-percentage of your trades to be winners to make money
Truth: You don’t have to win a high-percentage of your trades, you must maximize your winners instead…
You’ve probably heard of risk reward ratios, but do you really understand their power? You don’t need to win all your trades to make a lot of money in the market, in fact, you don’t even need to win most of your trades! How is that possible you ask? By understanding and effectively utilizing risk reward ratios.
Let’s say you set a risk reward of 1:3 for every trade you take. That means, you risk 1R where R = dollars risk to make 3R or 3 times your dollars risked. At this risk reward ratio, you only need to win 25% of your trades to breakeven and about 27% of them to make a profit (after commissions / spreads).
Let’s take 100 trades. Say you lose 70% of them that would be 70 out of 100; you have lost 70R which for examples sake we will say is $700 or $10 per trade ($10 = 1R). Now, if you have a 1:3 risk: reward, you are making $30 on all your winners, but you only had 30 winners, right? However, that is still $900 in profit! So, you lost $700 but made $900, profit of $200 even though you lost 70% of the time!
Risk reward ratios: You only need to win 27 – 30% of the time to make money if your winners are 1:3. With a 1:2 risk reward you only need to be right about 35% of the time. Traders get caught up in trying to win on every trade, but this is a fool’s game, very stressful / time consuming and simply not possible.
A 50%-win rate, which is totally possible if you’re a master of price action, can make you a very large sum of money each year by trading with a 1:2 or 1:3 risk reward. Most traders believe they must win at a very high percentage, but it’s simply not accurate and not conducive to a proper trading mindset.
Myth: Automated trading robots or indicators (systems) are the ticket!
Truth: Not if you want to succeed long-term or on any level of magnitude…
All you need to do is read some of the Market Wizards books and you will quickly realize that most of the world’s greatest traders are not buying Forex trading robots and simply loading them onto their computers and getting rich. This pipedream sold by computer programmers who know almost nothing about how to read the charts, is a huge trading myth.
Any fully mechanized trading system or algo-trading method is going to fail over time. Trading conditions change frequently and even rapidly. It takes an experienced, educated and skilled human mind to discern between good trading conditions and bad. If trading was as easy as installing some software on your computer and pushing the buy or sell button when the software tells you to, everyone would be a billionaire.
Think about the most famous traders and investors you know: Warren Buffet, George Soros, Paul Tudor Jones, any of the traders in the Market Wizards books; they are using their minds not trading robots. Don’t fall for the hype, learn to trade properly and then use your mind to make trading decisions.
Myth: You can only make money in trending markets or ‘easy’ market conditions.
Truth: If you know how to trade with price action, any market condition is game…
A skilled price action trader can make money in a trending market, in a market that is swinging widely and not in a perfect trend, in a range-bound / sideways market or even counter-trend. Obviously, there are times when a market is just too choppy to trade, but this is where your price action skills come in again; reading that chart from right to left and determining whether or not conditions are ripe for a trade. One of the beautiful things about price action is that it can give you good trades in trending or sideways markets. As we see below, a market that is confined to a trading range can provide many good trading opportunities for the savvy price action trader…
Myth: Day-trading is the fastest way to make money and get a Lamborghini.
Truth: Day-trading will probably cause you to lose money faster than a trip to the casino…
Shorter time frames give you more opportunities, to lose money maybe! – Shorter time frames contain more choppy, meaningless price movement and false-signals that will grind you down to a bloody pulp. TRUST ME – WAAY more lucrative and less stressful to focus on the daily charts and see a signal, enter it /set it up, then walk away for a week, as opposed to constantly obsessing on low time frame charts. You will save transaction fees, time, mental energy, and you will make more money trading by taking one or several high time-frame trades a month with minimal involvement by set and forget, than you will day trading.
Myth: I can’t use wide stops because I don’t have much money.
Truth: Money has nothing to do with your ability to place wide stops and wide stops are what you need most of the time…
Have you heard of position sizing??! Here it is – say you want to place a 150 pip stop loss because that is the best stop loss placement for the trade you want to take. But, you only have a $500 account – think that stop is too wide for you? Wrong.
All you need to do is lower your position size. If you want to risk about $30 per trade on that account, you would just need to adjust your position size to 0.20 mini lots on a that 150 pip stop, that is $30 on any XYZUSD currency pair.
If you don’t understand position sizing, you certainly need to make sure that you do before you start trading live. Again, you do not need a lot of money to take on wider stop losses! You simply need to reduce your position size! I am all about wider stops as they can keep you in good trading ideas and help you from getting stopped out prematurely like many traders do.
Myth: My relative or friend or told me trading is like gambling.
Truth: It can be, if you let it!
Finally, perhaps the biggest trading myth out there is that Forex trading or any type of speculating on financial markets is the same as gambling. This is a broad generalization / stereotype that the public who do not trade and know nothing about it, hold in their minds.
The reality is that if you want to gamble, you can do it in the markets. However, you can also treat trading like a high-class, upper-echelon profession that takes time and persistence to get good at. Unlike gambling at a casino, you can put the odds in your favor as a trader through proper trading education, learning from those more experienced from you and screen time. When you go to the slot machine at the Bellagio, your odds are always about the same; extremely slim. A skilled price action trader can make a full-time living trading the markets, easily winning 35% to 65% of their trades. You will never go to a casino and win even 20% of the time. So, trading can be gambling, if you allow it to be, as many traders do. But, if you want to succeed at it you have to focus and become skilled so that you make into a high-skill game of probability and mental fortitude, one that has nothing at all to do with luck.
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