7 Forex Trading Myths Debunked

Mar 3, 2021 08:06 PM ET
7 Forex Trading Myths Debunked

In the words of perhaps one of the greatest writers in history, George Orwell, ‘Myths which are believed in tend to become true’; he was correct. A misconception starts from a small herd of people until it becomes accepted by a larger group. 

As with any industry, forex is no exception to consistent myths. Knowledge is always necessary, especially with something as complex as a financial market. However, one should always be careful about the information they receive as some misinterpretations can be detrimental to their potential success. 

Let’s look at 7 of the most common myths in forex trading and the realities behind them.

Myth 1: You can trade without stop losses consistently

A stop loss, especially in a leveraged market like forex, is perhaps the only method to effectively control losses to a reasonable extent with very little or no manual intervention.

If traders were using nano lot sizes with large accounts, then theoretically, one may get away with using no stop loss (although it would be a bad habit). If we couple the above-average volatility and tremendous leverage in forex, managing losses with stops is a no-brainer.

Without using a stop loss, a trader will not accurately know the worth of their position size, increasing their chances of using unnecessarily higher margin than desired. Perhaps most importantly, the main benefit of a stop loss is to ensure losses are controlled within what a trader is comfortable with losing in real, predefined monetary terms.

Myth 2: Having a high win rate is the only way to make money

A high win percentage does not indicate or guarantee consistent profitability as a trader needs far more to be successful. Besides, due to the law of large numbers, a market with a 50% probability means that over time, the win rate should reach close to that figure.

What’s more vital in forex is your reward against your risk (or the risk-to-reward-ratio). Once your gains are significantly larger than what you’ve put down, the win rate becomes insignificant. Big winners can easily offset several small losses in between. 

The key formula is maintaining a consistently small set of losses while maximizing wins as much as possible through careful techniques like ‘scaling in’ or holding positions for large gains.

Myth 3: Indicators don’t work; price action is the only method that does

Indicators and price action are essentially two sides of the same coin. Both approaches rely on past data to make future decisions, except that one is a programmed tool while the other is more mechanical.

Both indicators and price action are technically lagging, meaning they produce a signal AFTER the market has already begun moving. How soon a trader reacts to this will determine their potential reward in that particular position. 

Another argument against this is traders shouldn’t use indicators nor price action in isolation or as standalone tools. A lot more goes into making a trading decision aside from the indicators or price action signals at use. 

Both of these certainly matter when one is looking for a trade set-up, but they aren’t and shouldn't be the be-all and end-all.

Myth 4: You don’t need a lot of capital to make a lot of money

Since trading is a business, capital is a trader’s lifeline; the more, the better. There is a caveat to this myth because ‘a lot’ is arbitrary, not quantifiable, and means different things to different people. 

What we could agree on is the larger the capital, psychologically, the fewer risks you’re likely to take because even a small position makes a notable difference to your bottom line. While the forex market is gracious enough to allow traders to trade with small accounts, it doesn’t necessarily make it a beneficial thing.

It’s a natural human instinct to react differently with $100 and $10,000. The only difference between these two figures is just two zeros, though it is surprising how one group of traders may take trading less seriously on the $100 and more on the $10 000.

Higher capital doesn’t automatically make someone a better trader, though there is a definite psychological shift in risk management and controlling greed. 

Myth 5: Leverage is dangerous

Forex is probably the most leveraged financial market, which is one of the reasons it’s a favorite among many. Fortunately, every trader has the option to decide how much leverage they will use. 

Using more leverage above what your trading capital can handle is a more dangerous part rather than leverage itself.  If used strategically and responsibly, this is an efficient tool to magnify gains.

Myth 6: Forex trading is easy

The easiest part is opening an account with a broker. Trading forex is the argument between what is simple and easy. There is simplicity in understanding the point of foreign exchange, how money is made, etc. It is not, however, easy because there is tremendous effort required with experience, knowledge, skill, and psychology.

Myth 7: You can master forex trading in a few months

Trading forex is a career just like any, where several years of experience are compulsory. The hallmark of any successful trader is how long they’ve been profitable. One of the reasons why it can take a few years to reach a mastery level is you have to expose yourself to different market conditions.

An experienced trader has witnessed and survived extensive bull, bear & ranging markets. If we also consider forward-testing, performing this requires at least a year’s worth of trading data to ensure a particular strategy is robust enough. Learning about all these factors takes a lot of time.

Conclusion

Nothing beats experience. What a beginning trader sees in their first year being in the markets will change after one year. This is good as the sooner someone sees the truth, the better it is to have realistic expectations of the game. 

If traders could stop believing in all of these myths (and any other ones), this would put them well ahead of the pack.


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