6 most common myths about Forex trading
Here we gathered the most interesting of common myths about trading on Forex. Some of them you already might know from somewhere, but we decided to give more simple explanation for those who might be scared off by technical details.
Did you believe in any of those myths? Read and let us know what you think in the comments below.
#1 You can achieve 100% profitability
Losses are an inevitable product of trading, and every trader/system may encounter them. Unfortunately, perfection can never be achieved, even the biggest traders lose money. There are thousands of anonymous participants in the market. Each of them has his/her own goal that you cannot know beforehand.The trader is at fault only when he fails to follow his plan, regardless of the outcome (win or loss) of a trade.
It is only the possibility of loss that creates the opportunity for some traders to win. Without some kind of risk, no profit is possible. If you learn the fundamentals, develop a good strategy, trade according to that strategy and manage the risks - your account will grow.
#2 A good system can be transferred to a different timeframe, and still remain profitable
Markets may be 'fractal' to some extent, but the price patterns on long-term timeframes are qualitatively different to those on short-term ones. This is likely caused by such factors as macroeconomics, liquidity needed by heavyweight players, relative effect of news announcements, session considerations, etc. You can’t change strategy’s timeframe and expect it to work with the same result.
#3 You shouldn't push your luck
So far there is no scientific proof that if you’ve made profit, you are less likely to make it next time. Quitting only because you earned profit (to avoid "pushing your luck") is based on superstitious fear. Millions of traders get profit and loss every day, market won’t change its behaviour because of one trader.
To put it simply, there are same chances of your gain increasing or decreasing, just like at any other time. Market behaviour and probabilities are not going to change merely because you had a winning or losing streak.
#4 It's better to focus on one or two major pairs
It works for some people, but most of experienced investors advice to diversify your portfolio. This helps to manage the risks and also useful in trading.
For example, pairing the most negatively correlated currencies (the strongest against the weakest) delivers the best probability of catching strong, clean moves.
For example if GBP/USD and USD/JPY are both trending upward, then GBP > USD > JPY, and hence GBP/JPY will be trending upward even more steeply.
#5 Adding more filters to a chart will improve your trading
All indicators are derived from the price (and, in some cases, the volume). It means that adding more indicators to the same timeframe will not necessarily provide independent confirmation, nor add value. Ultimately one will have to enter a trade on some candle, and one can enter on an earlier or later candle by simply re-calibrating any existing indicators.
Non-linear indicators (which aim to reduce lags and overshoots without compromising smoothness) are not necessarily superior to conventional indicators. Attempting to enter the market earlier may lead to the entry catching a minor correction in the trend, rather than the desired full-scale reversal.
#6 All price movements are random
Many traders and analytics struggle over this thought at some point. Sometimes it seems that whatever you do, the market will stay unpredictable. Many people have fallen into this trap of thought, but we will stay rational and try to analyse what it would mean if this were true.
Imagine that all types of analysis would be useless, all systems would have a long term expectancy of zero, all P/L would be completely random and all traders would eventually lose. This sounds terrible but at the same time not realistic.
Many proficient traders already know it’s not true, but let’s gather some evidence of non-randomness for those who have doubts:
- The large price spikes that happen after news announcements.
- The price stabilisation/profit taking that tends to occur after some rapid moves of the market.
- Traders tend to place their stops just outside swing points.
- That volatility frequently shrinks significantly as the market awaits a big news announcement and etc.
However, the fact that non-randomness exist doesn't automatically mean that it's always possible for the trader to exploit them profitably. Spikes that occur the instant that red news is announced is one such example.
The statement that “All Price Movements Are Random” is false. It is proven and mathematically possible to profit systematically from trading. What might look like randomness, at first sight, is probably just a lack of information or knowledge.