Whether you trade the prediction markets, forex, stocks, or commodities, there is a load of information passed off as truth and accepted by traders, but which is a total bull. Here are some market myths circulating the financial industry…and the real story behind them.
Complexity is Best
No, simplicity is good. Complex strategies and trading methods just don’t work for most traders. While it’s tempting to add more indicators to find more trades or attempt to filter out some bad ones, such endeavors are likely to be fruitless in increasing overall profitability. Price is the ultimate indicator, and heaping on many rules or indicators won’t change which direction the market is going. Almost all indicators are just manipulated price data. Keep your strategy simple; base it on price movements, with one or two indicators tops (if required) that provide an entry and exit for each trade, and keep the risk very small relative to your account value.
Trading is an Art
Have you heard the saying, “Trading is an art, not a science?” Don’t believe it. If you want to be successful in the markets, you need to develop scientific-like tendencies. Your trades need to be precisely executed, and your position size is managed strictly to control risk. Winging it or getting “creative” with trading simply means the time hasn’t been put in to come up with and test out a viable strategy. Good traders hone their techniques by writing down their plan, then executing it precisely, recording results, and then looking for ways to improve, all the while keeping it simple.
More Trades = More Money
If one trade makes you money, then three should make you even more, right? Possibly, but not all the time. There is a tendency called “over-trading,” which involves making trades when there is no real market-based reason. One tell-tale sign of over trading is when you trade based on emotional impulses–you feel bored, so you make a trade, you want more money so you make a trade, you just had a losing streak and want to make it back, you’re afraid you will miss an opportunity or any other reason that pops into the ol’ noggin which is based on emotion and not a sound pre-defined trading strategy. Trade on emotion, and you’ll likely abandon all your strategy and ruin the hard work you have put into finding a logical way to trade the markets. Only trade when there is a good reason.
There is a Perfect Strategy
Ever fantasize about the perfect strategy or trade with little foreknowledge of what the market will do? I have, but it’s fantasy. Despite what advertisers, authors, and people trying to sell you something will tell you, all the best and wealthiest traders in the world have losing trades…lots of them! Losing trades are part of the trading game. Don’t try to eliminate them because you can’t. Find a strategy that wins more than loses, manage your risk, and grow your account slowly, allowing you to take larger positions and create more wealth. Success doesn’t come from a 100% win ratio; it comes from sticking with a strategy that provides you a slight edge, being patient, and sticking to it so that edge can bolster your account size over time.
Get Rich Quick
There are stories all over of how someone bought a penny stock and became a millionaire overnight, or a trader who had an epic run over a year and grew a $500 to a cool million. These things do happen, but they don’t happen often. For every one of those people that hit it big, thousands upon thousands of traders lose every day, and thousands upon thousands of others break even or make a slight profit. Trading to get rich quickly will leave nearly all those who attempt it with less than they started with. Instead, realize the true odds of trading. It takes work, and you’ll only ever get a slight edge, which then must be leveraged with patience and discipline to grow your account over the long term. In this way, you have the best chance of getting rich (hopefully, but there are still no guarantees), but it isn’t quick.
Money Management Doesn’t Matter.
I view money management as how much you risk on each trade–your position size–relative to your account size. It can involve more than this, but that is one of the most significant factors in managing trading capital. Generally, no more than 5% (preferably less) of the account should be risked on a single trade. If you have a $10,000 account, don’t take trades where you can lose more than $200. Why? Because even a great strategy can have a string of losses. If you risk 10% of your account on each trade, you can be wiped out in a very brief time frame. No matter what the track record of a strategy is, it’s fallible. Don’t risk too much of your hard-earned money on one trade. Risk a small amount, and you’ll never have to worry about losing all your capital. A loss means nothing when you risk only a small percentage of your account, yet your account can still grow over time if you have a good strategy.
Trading is a long education process, mainly because there is so much information that shouldn’t be trusted. Don’t accept what experts say (including myself) without doing a little digging yourself to find some verification. The markets can reward stupidity and punish cleverness, which is why it can be so hard to find or create strategies that stand the test of time. But if you put in the time and combine your research with the research of others, I firmly believe anyone can become a successful trader with patience and discipline.