7 Forex Myths For The Intermediate Trader
The problem of misinformation is common when it comes to highly technical fields where opinions have room to diverge. Forex is no different due to the highly personal nature of trading strategies. Even traders that use a specific strategy will have personalized it in some ways due to their own beliefs and opinions on what makes it successful. It isn't wrong if it's consistently profitable in forex. Not everyone walks the same path to success in the field. That does not account for damaging myths that become common belief due to how often they are repeated. Traders can easily fall into the habit of taking myth to heart because of the complex nature of the forex markets. The following myths are ones you should avoid when analyzing currency pairs or placing your trades.
1. A Simple Approach Is Likely To Be More Effective Than A Complex One
This myth is perpetrated by traders that feel their ultra simple and light system will have better results than more complicated ones. The problem with it is the word "Simple". A word like simple is entirely relative and misrepresents the reality behind the scenes. You can take a "simple" strategy like Price Action and utterly fail with it if you don't understand how price is driven in the market. Every simple strategy has many layers of complexity beneath it that the trader needs to work to understand lest they fall into the habit of making bad trading decisions with no real reason behind them.
There is no "simple" in forex that will work consistently. It is as unattainable as a forex "holy grail". Even the simple approaches have many nuances and undercurrents driving them- which makes them not simple at all.
2. Complexity Of Strategy And Approach Is More Profitable
The forex markets are a fairly complicated creature that can be extremely difficult to predict. Many traders wind up going too far in trying to apply several methods of analysis, indicators, and an overly complicated trading plan. Quite often they are inundated with conflicting information that renders them unable to actually execute a trade by their criteria. On the other side of the coin is an oversimplification of factors. Not having enough information to find entry and exit points in the market can make for false signals that go nowhere.
The comfort zone is more in the middle. More indicators is rarely ever better. Why? Well, if you have two volatility indicators they are both going to be showing you the same information, just in different ways. So why even have two? Adding more tools and indicators to the system just means there are more opportunities for the process to break down- the same way that a complex machine will break down more than a simple one. Additionally, the trader winds up having to spread their learning around to several different indicators instead of mastering one or two that can help them generate profit.
If there are more than three indicators in your strategy, it is time to reevaluate their contribution to your success if you are struggling. On the other hand, if you are successful and steadily building profit with them; that's all that is truly important. You CAN be successful with many indicators. You can also be successful flipping a coin. That doesn't make it a good idea- but if it works and lets you build profit then there's no reason to change it.
3. Determining Regular Profit Targets Is A Good Way To Attain Regularity
There are some systems that benefit from having a profit target identified. Scalpers will often set targets because they are investing much more time and energy into the charts than long-term traders. That doesn't mean it is necessarily a good practice.
The problem is that the markets don't care what your targets are. You can't pound a square peg into a round hole. If you project 20% and the market only wants to offer up 5%; then 5% is what you will get. Traders that attempt to force it will often make bad trades on suboptimal set ups, setting themselves back further in the process.
If you're going to set targets, make them less specific goals like- "I want to place at least 5 profitable trades today" or "I want to take one optimal set up per week". That way you're setting goals to strive for but have enough room in your mind to discard a set up if it does not meet the criteria you set for entry.
4. Letting Profits Run And Cutting Losses Will Make A Profitable Trader
This commonly cited piece of advice is a gross oversimplification of a more complex series of events that needs to occur. At face value, it appears quite true and logical. The trader experiences problems when market events don't coincide to fulfill this line of thinking.
The trader consistently cuts losses- all well and good. The trader aims to let his profits run- but will they run? Did the trader enter in a location where price action has exhausted itself? Was it an optimal set up technically but lacked fundamentals to push it into a bigger profit for the trader? Is the trader executing a potentially losing transaction that is ready to turn back?
Amending this myth to include "If Everything Goes As Speculated" would make it more accurate; but doesn't necessarily have the same kind of ring to it. A trader that wants to let their profits run would do well to focus on understanding what drives trends and makes them run in the first place.
5. Listening To "Experts" Will Provide Greater Returns In The Long Run
This particular myth is often viewed as basic knowledge but even intermediate traders fall into the habit of putting too much faith into analysts and experts. Granted, the expert may have a very good handle on their strategy and be quite profitable with their forex trading. Or... they may not be. There are a number of self-appointed experts and analysts that do not offer proof to back up their claims. It essentially becomes a request to "just trust me"- a bad proposition for anyone interested in making and keeping money.
In the event a trader finds success with the advice of an analyst- what happens when that analyst goes away? Is the trader equipped to do their own analysis now? Or have they gotten lazy with trying to understand what they are actually looking at?
Analysts and experts can provide an excellent jumping off point for learning the intricacies of the forex market. The trader interested in success needs to check and cross-check every "fact" that is presented to them so it can be incorporated into their own trading strategy and style. A forex trader's brain and their trading plan are the only resources they should need to determine their success or failure.
6. A Trader Needs To Make Exact Predictions To Be Profitable
Forex traders are faced with a daunting task of always trying to find the optimal entry, exit, and get their analysis absolutely right. Many websites and gurus beat the drum on striving to find these absolute perfect spots. The reality is far more intangible. Instead of thinking in absolutes, the successful trader needs to understand there are intangibles. There is a possibility of success. There is a possibility of failure. One must look at every trade as a door leading to many possibilities.
This problem is more prevalent among intermediate traders than novices because they have had the time to experience some success or failure along the way. It's easy to fall into this line of thinking after enjoying a string of wins or suffering a string of losses. At the end of the day, we must always strive to approach trading in a way that let's us view opportunities as potential. Risk versus Reward should be at the forefront of the trader's mind. If there isn't a high chance of reward, better to let it rest until the next opportunity comes along.
Sub-par opportunities will torpedo profitability. Traders often struggle to stay profitable once they are floating around the break even point because they fail to stick with what has been working for them. Don't be that trader!
7. Success In Other Financial Markets Does Not Equal Success In Forex
Several traders that want to step into the forex markets do so from other economic and financial markets. Experience in other markets may not translate to success in forex due to some notable differences. Many other markets have closing times during the week so are not subject to the same kind of volatility that currency pairs can have. Often, there is in-depth analysis required that slightly differs from what the trader is familiar with.
Familiarity is another concern. Habits forged in other markets can easily stain the path to profitability in forex. The trader needs to be certain to honor their respective trading strategies in the different markets if they hope to make any meaningful gains.
There is a significant benefit in the mental game however. Many of the money and risk management principles used in forex are the same in other disciplines. Practitioners looking to cross over into a new market will have a much easier time with their risk and money management than new traders.
This post was written by Dennis Heil, a private forex trader from Ventura CA. You can read more articles from Dennis over on his MahiFX author page.
MahiFX now offer MT4. Sign up here.