Five forex trading myths

With over USD4 trillion in trading volume a day, most people have heard of the forex market. And, most of them have probably heard a few myths about it.

Following are five common myths about forex trading – by knowing these myths, traders can often avoid unnecessary frustration.

Myth 1: Forex is a way to get rich quick

The expansion of the retail forex market has resulted in an influx of new forex providers and new advertising. Consequently, you may see advertising that claims that people with relatively little knowledge or experience can make a profit.

Although some may benefit from beginners’ luck, getting rich quick is very rare. The traders who make the most consistent profits over time are those who have trading systems in place that outline their rules for entering and exiting trade, their risk management strategies, the markets they trade and even the hours they trade.

Myth 2: You can win every time

No strategy is successful 100% of the time, and waiting to find one that is will lead to a trader watching from the sidelines or entering the market with an inflexible strategy that will not adapt to new conditions.

Accepting that not all trades will be winning trades is an important part of trader psychology, and being prepared for this is an essential part of your risk management.

Myth 3: The more pairs you trade, the better

Yes, a trader may make a profit by trading one forex pair. Logically, one might assume that he could make ten times more profit by trading ten forex pairs. Unfortunately, trading a large number of pairs is more likely to result in losses, as it leaves a trader’s attention divided between several trades. Choosing one or two pairs to start with will increase a trader’s chances of success as he will be more able to stay up-to-date with the news on those currencies as well as their price patterns, and will, as a result, be more likely to find potential trading opportunities as well as exit losing trades quickly.

Myth 4: The more complex the strategy, the better

Traders often start with a simple strategy, and they make a small profit. Then, they take more variables into consideration, tweaking their strategy again and again to try and increase their returns.

However, instead of determining whether a market is trending or ranging, this results in the trader attempting to determine exact reversal points. And, often this only results in more trades, rather than in more profits. As even successful traders may only make slightly more than they lose, if a strategy works, stick with it, and those profits will add up over time.

Myth 5: Placing a stop is risk management

Risk management and money management are two of the most important aspects when it comes to trading success. However, often the only risk/money management that traders use (if they use anything) is a stop loss.

Risk and money management do not only consist of placing stop losses, but also comprise setting limits for the amount of capital you risk on a single trade or over a certain amount of time. This helps determine your position size, the placement of your stop losses and limit orders, as well as how many trades can be open at a single time. Ignoring risk and money management will result in overall trading failure, even with the best strategy.

Conclusion

It is essential that traders research what forex trading involves. Although a lot of this comes with experience, new traders can increase their chances of success by educating themselves on the various myths around the forex market. By developing strong trading strategies that include risk management and money management, these myths can largely be discarded.