Don’t subscribe to any of the following Myths. Learn to approach the forex market as an independent thinker unshackled by any conventional “wisdom”!
1. “With ten thousand dollars I can leave my job and trade for a living.” Or the reverse: you need to have a lot of capital to get started trading in Forex”
Let’s take the first variation. Ten thousand dollars is only a tiny account for someone earning the average “good” return per year of 20 to 40%. Let’s face it, even if you made 100% per year – and virtually no trader does this consistently – you can’t live on that sort of profit, i.e. ten thousand dollars per year salary.
The reverse of this is that you need to be a cashed up individual with Swiss bank accounts who drives around in the latest Porsche in order to trade. But again, it comes back to the question of how much you need to make per year to live on, combined with how much you make as a percentage of your account each year.
So if you figure that you need a salary of fifty thousand dollars per year in order to live, you do the maths like this: work out what kind of percentage you will realistically make from trading your account each year, and see if that covers your fifty thousand dollar requirement.
If you’re one of the elite traders who can actually make 50% per annum safely, then you will need a one hundred thousand dollar trading account to begin with. It’s simple maths, and something every trader should do before leaving their day job to trade.
The reality behind the myth is that it is a misconception that shows the trader’s lack of knowledge of what trading forex entails. So if you suffer from either of these myths, the best advice is to hang on to your day job until you are both a consistently successful trader and have an account that will realistically support you once you do quit to trade.
If you want to explore this further go to How Much Money to Trade?
2. “The Trend Is Your Friend”
If you are a trend trader you will believe this one fervently. But the fact is there are trends within trends, and counter trend bounces within those trends can be just as profitably traded. See Forex Trends And the Best Forex Trend Indicator for a detailed discussion.
3. “If I can make 50% of my trades winners I will at least not go broke, and should breakeven or do better”
This one depends on the size of your average winner as compared to your average loser. Pretty obvious maths once more, but it’s surprising how many traders persist with a non-profitable system that averages around 50% winners.
If you make 50% winners and your average winner is the size of your average loser, you will eventually go broke, count on it! The spreads and commissions you pay in trading will see to it, and with a 50% win rate you are bound to get a nasty run of losses sooner or later that will really damage your account.
Check out our section on forex robots for an explanation of why automated forex trading systems usually need to average above 80% winners.
4. “I need to know where the market is heading next in order to be profitable”
The surest antidote to suffering from this myth is to read Mark Douglas’ Trading in The Zone. Mark’s exposition of the trading game as an exercise in probabilities entirely divorced from predicting the future is classic, and absolutely required reading for any trader.
The bottom line: you don’t need to know where the market is heading today, next week, next month or in the next five minutes. You need an edge – that is, a proven strategy – that tells you when and how to enter a trade given certain signals. That edge will define the likelihood of your success, despite what you believe to be the imminent market direction.
Firstly, the amount of control the “Big Dogs” have over the Forex market is somewhat limited, given the size of the market.
Secondly, as a smaller retail trader you can still easily make money. You just have to to follow the large players and the moves they make, not fight against them.
Armed with a good fundamental knowledge of the forex market combined with a suitable strategy based on sound technical analysis, you will be able to see the moves made by the big dogs, and by playing along with them, make money as well.
6. “Forex is the most dangerous market to trade”
I first heard this when I switched from trading stocks to trading forex. It was based entirely on ignorance. Those making the claim were almost invariably unsuccessful stock traders who had formed the opinion that trading in general was a mugs game, and that by extension the forex market, being the largest market, must be the biggest mugs game!
Forex Fact: for the trader who takes the trouble to get a sound education in both the fundamentals and technicals, the forex market is no more dangerous than any other, and arguably a lot safer than some. Its 24-hour nature smooths out a lot of the gaps. Also, the incredible liquidity in major trading sessions can make managing trades much easier than in choppy conditions such as encountered in some Stock Markets.
7. Forex, being a 24 hr market is safer to trade
It may seem strange saying this is a forex myth after using the 24-hour market facet of forex as a positive in the previous myth. But there are traps attached to the 24-hour nature of the forex market.
The most obvious is that the beginning forex trader assumes the same conditions continue throughout the entire period of trading. This is not so, the market fluctuates and often spikes depending on the time of day and the geographical session.
For example the London open can be quite volatile, then things will usually settle down if there is no major news announcement pending. And the whole of the Asian trading session can be very quiet indeed, making this quite difficult to trade as price movement is very small.
Personally, I have found ways to trade Asia (because I am Asian-resident and have had to) and have now adapted to the session quite well. But don’t assume that any one hour out of twenty-four is likely to be similar to any other. See Forex Market Hours for more.
8. “If I trade along with others in a trading room I will be more successful”
I actually believed this myself at one time. Forex Fact: it works for some, not for others.
It certainly didn’t work for me. I found I was far too distracted by what others were trading, and talking about, to manage my own trades successfully. I was also very influenced by the opinions of other traders, especially if I felt that they were more experienced or better traders than me.
The funny thing is, I did far worse by trying to follow the advice of those supposedly better traders than if I had just stuck to my own analysis.
Jesse Livermore went so far as to totally divorce himself from the opinions and even the presence of other traders in order to cut out all this “static”. So too did Nicholas Darvas. Take a look at Best Forex Books for more on these two traders.
9. “Trading is the ideal lazy business way to riches”
As I make the point elsewhere on this site, trading is a simple matter but likely to be the most difficult thing you ever attempt!
Don’t neglect the fundamentals: a sound and thorough education in the forex market, a sound appreciation of your own unique psychological profile, and a strategy/system/approach to trading the forex market that is tailored to your own unique psychology.
Ignore these and I can guarantee you will discover that trading is the ideal lazy business way to bankruptcy in the shortest possible time.
10. “Never stand in front of price.” Also known by sayings like “Don’t fight the tape” etc
Somewhat related to the myth on the trend always being your friend. It is more a statement of the trader’s style of trading – trend trading – than it is a statement of fact. It is often spoken by traders who are fearful, and therefore choose to trade in a manner they believe to be safest.
Forex Fact: there are methods for picking the tops and bottoms in short or medium term price movements, and getting a sound entry at or near those extremities. The Price Action Engine thrives on such trades, because it identifies the levels at which price is highly likely to react, and gives you the MetaTrader toolset to fine tune your entries, stops and exits.
The next entry in our Forex Trading School section concerns Forex Scams. Click the following link to go to Top 10 Forex Scams