11 Misconceptions about Forex (that can ruin your trading career)
Trading successfully is probably one of the most rewarding jobs on earth. It’s beautiful.
Sadly though, not many traders get to that goal. And the reason trades don’t achieve their goal varies…
Some traders get attracted to the forex market because of the wrong reasons (i.e. looking for easy money). Some other traders come to the forex market already with a losing mentality, so it is just a matter of time before they wipe out their trading accounts, etc.
And that’s sad you know, because it’s not their fault, some times they just saw a misguided ad somewhere, or read about it in a blog, they thought it was easy, decided to open an account and boom.
So in this post I’ll try to address the most common misconceptions about trading.
If you think I forgot about an important one, let me know in the comment section and I’ll add it.
Here we go…
#1 There is a system that is right 100% of the time
Some new traders (and a few experienced ones) come to the forex market looking for the holy grail of trading: the system that is right 100% of the time.
If you are one of them, I don’t blame you, I know some broker or other trader made you believe that.
But let me tell you something.
There is no system that is right 100% of the time (sorry to disappoint you).
You are going lose trades, but you will also win some other trades, you just need to make sure you make more money when you win than when you lose.
You don’t need to be right 100% of the time to make money, in fact, I can prove you that even if you are right only 50% of the time you can make money.
Let say you take 10 trades, you win 5 and lose 5. When you win, you make 100 pips, and when the market goes against you, you lose 50 pips.
5 trades x 100 pips = 500 pips
5 trades x – 50 pips = – 250 pips
Final result: 250 pips on your favor.
This is what a 2:1 (100/50) risk-reward ratio (RRR) can do for you, imagine what a RRR of 3:1 or 4:1 can do for your trading results…
Really… do some calculation and see what you can get…
So this is how it works: there are two important aspects of every trading system:
- Risk reward ratio
You don’t have control over the accuracy of the system (you never know if your next trade would be a winner), that’s given by the market.
What you have complete control of (well, at least 99% of the time) is how much are you willing to risk and how much you are willing to make in each trade.
So you just need to make sure that you have a RRR greater than 2:1 a sound entry system and you are god to go.
Still with me?
Ok, here is another one…
#2 The more complicated a system is, the better results you’ll get
I’m sure you’ve seen a chart like this one:
Does it make sense to you?
At least not to me.
If you trade like this, I don’t blame it on you, it’s human nature: we always want an explanation of everything (why the market moved like this, like that, we incorporate a new indicator or new tool for each move, and we end up with a system that is very complicated to trade).
For some reason we think that the more complicated a system/strategy is, the better results we are going to get.
But that couldn’t be furthest than the truth.
In fact, I can tell you that the more complicated a system is, the worst results you will get.
Because if you keep adding tools, indicators, etc more things could go wrong plus, at some point, all your tools and indicators will get you confused and you are not going to be able to take good decisions.
And you know that trading is about taking the right decisions at the right time.
If you use a chart like the one above, get rid of everything (I mean tools & technical indicators).
Just use one indicator, and use it as a filter instead of an entry signal.
I’ll also recommend you to use support & resistance levels, they are one of the simplest tools to use, and yet, one of the tools that can help you get the results you are looking for.
#3 Fibonacci and other magic formulas can help you get better results
Alan Greenspan, in my opinion the best forecaster ever. In his book “The Age of Turbulence” mentions what he thinks about currency forecasts:
“…forecasting exchange rates for major currencies is as accurate as forecasting the outcome of the flip of a coin.”
If this is what the best forecaster in the world thinks about forecasting currency movements, what’s left for us?
Let me tell you what I think.
Well, I don’t think we (traders) should be moving in that direction about “forecasting movements”
It’s all about adapting.
And by “adapting” I mean, instead of trying to guess (some traders name it “forecast”) what the market is going to do… We should trade based on what the market is actually doing.
In other words, let the market make its first move, let the market tell you where it is heading, and once you are confident about the direction the market is likely to take, then make your move.
See the difference?
I think Elliot Waves, Fibonacci, Gann and other forecasting tools are probably the result of us trying to find an explanation of every single movement of the market, but hey, sometimes there is no rational explanation of why the market moves like it moves.
Instead of trying to guess, you need to patiently wait for the market to tell you which way it is heading.
Wait for the market to make its first move, then you make your move, wait for the market to tell you what direction to trade.
Do you agree with me?
#4 What doesn’t go up, must come down
Do you know what the heck do I mean by this?
Some traders come to the forex market with the wrong idea that the market either goes up or down.
So they think, if my “long” didn’t work, I’m just going to “short” it.
But that’s not how it works, most of the time they end up with two consecutive losses.
So the best thing to do when you get stopped out is to forget about that currency pair and go look for trade opportunities on other pairs.
The market could trade in very different ways, sometimes it goes up, some others the market goes down, some others it just stalls, some others it behaves in erratic ways, etc.
There are times when its best not to trade a particular currency pair (or market).
How do I know when to trade and when to stay on the sidelines?
I only trade the currency pairs that have the clearest market conditions, the ones that I’m certain what the market is likely to do.
This is the reason why we shouldn’t focus just on one currency pair (but more on this later).
#5 You can get rid of emotions
Some traders say that once you get rid of emotions, you will trade with successful results.
Well, let me tell you a little secret:
You cant get rid of emotions.
They are part of us, they are what make us humans, they keep us alive.
So what we need to do instead, is to make them work on our favor.
We need to have fear, but to trade outside of our system, that’s what we need to have fear of.
Emotions are part of trading.
The best way to make your emotions work in your favor is to have a system that fits your trading style, risk profile, time availability, etc.
This way you’ll feel confident and comfortable trading with it, therefore you’ll have no problems trading it with discipline.
Do you know what around the corner after trading with discipline?
You guessed it, consistent results.
That’s the reason you need to make sure to trade a system that you feel confident & comfortable with.
#6 Robots and automated trading is the way to go
Some other traders try to get rid of emotions using automated systems… but…
So your idea about trading was to find out an automated system (or robot) that traded for you all night and day long…
While you did something like this:
I’m sorry to disappoint you, but that never is going to happen and here is why.
You see, even when you see two patterns and think both of them are identical… they are just similar, and because they are just similar, each one of them have different possibilities.
One might end up going up and the other one down.
So the thing is this, an automated system its supposed to trade in the same way during all market conditions.
This is like saying that the market will adapt itself to the system/strategy, and that is never going to happen.
Traders are the ones who are supposed to adapt to the market conditions, not the other way around.
In fact, I think this is the only way to achieve consistent results, to adapt to the market conditions.
If the market is going up, you look for long opportunities. If the market starts to go down, then you adapt and start looking for short opportunities. If the market trades in a range, you go ahead and start looking for trades on the extremes of the range, and if you see the market doing crazy things, you just stop trading that currency pair.
It’s good that we have plenty of currency pairs to choose from.
So the idea is to trade only the pairs that have a clear market condition, forget about the other ones.
#7 It’s best to start trading only with one currency pair
I know that new traders need to get their feet wet little by little.
But once you understand the mechanics about trading, and start taking some trades, it’s a big mistake to trade only one currency pair.
You might find arguments that its best to get to know a pair better, or it’s easy to get overwhelmed if you trade many pairs at a time.
The thing is this, sometimes the market is not tradable. What I mean by this is that you need to trade the market only when certain conditions are met, for instance, when it’s got a clear market condition, it’s got good profit potential, etc.
But there times when the market its just too choppy, it starts to do crazy things, and if you are trading only one currency pair, you are going to force yourself to take trades under those market conditions.
And believe me, you dont want to trade under those circumstances.
The idea is to trade only the currency pairs that have the clearest market condition.
And in order to do that, you need to analyze a few of them and focus only on the ones you feel most comfortable with.
If you are just getting your feet wet, yes, start only with one currency pair, but once you start placing some trades, the best thing to do is to focus on more.
Or… does it make sense to trade a currency pairs that is behaving erratically? Why would you risk your capital in that currency pair if I’m sure you can find another one with a clearer market condition?
See my point?
The idea is to trade only the pairs that have the clearest market condition, that’s it!
#8 Our job as traders is to make as many pips as we can
Some traders think that our job is to make as many pips as we can every day.
But that’s not true.
You can make many pips using different methodologies, like:
- Trading the news announcements
- Following someone else’s advice
- Following out gut
- Just because you felt like going short
But non of the above are good for us… Do you know why?
Because we are not able to replicate those results in the future.
So our job as traders is to make the kind of pips that we can replicate in the following days, weeks, months and years to come aka. Following a system.
This means that our job as traders is not just to make pips, but to make them using and following a clear system/strategy.
This way you will be able to get similar results in the days to come.
You see where I’m getting at?
#9 In forex, 2 + 2 equals 4
Picture these two scenarios:
You are asked to answer one of the most difficult questions ever: 2 + 2 = ?
Scenario A. 2 + 2 = 4, right… you get your candy.
Scenario B. 2 + 2 = 4, wrong… you get slapped.
Most areas in life are like Scenario A. You do everything right, and you get good results. You follow your rules, you do what you are supposed to do, and everything runs smoothly, no body yells at you, no body slaps you, and you get the desired results.
But trading, trading is a little different. In fact, it is more like Scenario B. Even when you do follow all your rules, even when you do exactly what you are supposed to do, you could be wrong. H
Hey, but it gets weirder, listen to this… you could also do everything wrong, you could do the opposite of what you are supposed to do and you could be right!!!
Weird isn’t it? I don’t know about any other areas in life where it gets like this… if you know of any, let me know, I have a tendency to like them :)
That’s right, even when you follow your system, let’s say you go short at 13:30, the market could stop you out at 13:31… But you are still doing things right (if you followed the system).
So we need to adapt, most of us think that there is a positive relationship on doing things right and the $$$ result (monetary result). But in trading it isn’t like that, the relationship that is really important about “doing things right” is: whether or not we did follow our system:
The relationship is like this:
So far we have talked about doing things right (following your system), and having a negative outcome. But the other side is even more devastating: Not following your system and the market goes on your favor.
When this happens, you’ll start to think that you are even better than your system, unconsciously you will not trust it and try to outguess it and you know what happens next…
We do things right when we follow our rules, regardless of the end result of our trades.
And the next time you outguess your system, I hope the market turns against you… believe me, It will be better for you!
#10 You can double your account every month
The other day I got contacted by a trader, who wanted me to teach him how to make 100% on a monthly basis. He said “it’s per month eh, not per day or week… I’m not asking something unrealistic here”.
I explained to him it is impossible to achieve like that and he replied, “Well, I better take my business somewhere else”.
Let’s see what happens, just for fun… If a trader starts with US$250 of trading capital (some brokers allow you to open an account with that amount of money) and consistently achieves 100%, on a monthly basis. This is what I get from my spreadsheet:
By the end of the fourth year, you’d be the master of the universe (I’m not kidding, you’ll own everything you see + everything seen through the Hubble telescope).
You think this is possible? Of course not, that’s out of question, but why would someone think this is possible? If you thought lack of education I agree with you.
Some traders are attracted to the Forex market because of sales ads around the web/tv showing how easy is to make money on the Forex market, and of course most of them never mention the risks involved.
Larger returns always require larger risks.
If you want to get 100% of return per month, you’ll need to risk a similar amount of money. And yes, you could get lucky the first few months, but sooner or later, the market will teach you that this is not a game and you’ll probably end up blowing up your entire account because you are risking too much.
So, instead of trying to own the world on the first four years of your trading career, why not trying a more realistic approach: growing your account steadily, risking a small percentage of your account per trade, using sound money and risk management techniques, handle each trade, being disciplined? From my point of view, this is how it’s done.
It requires discipline, hard work, commitment, managing risk and capital, a sound strategy, to know yourself, control emotions, and more to make it possible. Yeah, it’s not easy (there is no free lunch), but listen, once consistent, it is probably the most rewarding job on the world.
At the end, I think articles such as the one you are reading, or the one on Reuters I mentioned above are good, not because of Forex being riskier than other markets, but because the better traders are educated about the risks involved using leverage, the better their possibilities to succeed in their task to become profitable traders.
#11 The most important aspect of trading is your entry signal
If the market is going down… It doesn’t matter what tool, indicator, system, methodology you use to go long, the market will stop you out.
It doesn’t matter if you trade off the 1 minute chart or off the daily charts, if you keep going long when the market is likely to continue its way down, the market will get your stop loss level.
You can even be the most mentally fit trader in the world… but if you keep going long when the market has a bearish sentiment, you will most likely get stopped out.
Our job as traders is to trade is not to trade every day… Our job as traders trade only when the market has a good possibility of moving on one direction over the other.
So we need to be able to analyze the market and determine whether it is more likely to go up or down.
When you know what the market is likely to do:
It doesn’t matter what tool, indicator, system, methodology you use to long, if the market is likely to continue its way up, and you go long… you are more likely to win that trade.
You can trade off the 1minute chart, or the daily or weekly charts… but if you keep going long when the market is moving up, you are more likely to win that trade.
It doesn’t even matter if you are the least mentally fit trader in the world, if you go long when the market is likely to move up, there is a possibility that you will win that trade.
I want you to do one thing for me…
Leave a comment below and tell me if you agree with me with all these misconceptions.
Or if there is something you don’t agree with me, I’d also love to know.
So please leave a comment.