TGIFF #016: The Truth About The 7 Most Common Trading Myths

Trading Myth #1

Myth: You need to be an Ivy-League, Wall Street hotshot to make it as a trader.

Truth: You don’t need to be super smart; trading is a learnt skill that anybody can learn overtime.

Trading isn’t only for some super-genius math wiz who sits there coding algorithms all day. 

In fact, just like being overly emotional can be bad for trading, so can being overly analytical. 

Those who are too analytical tend to overthink and think themselves right out of perfectly good trading opportunities.

Ideally, you want to have a good mix of gut feel and analytical trading abilities.

Both of which are very achievable.

Your gut feel will give you many trading ideas and the desire to take them but your analytical /forward thinking abilities will be the check that keeps your trading in balance. 

Only when a trade idea passes both your gut feel and your logical, objective analysis should you consider entering it.

The point of the matter is that college degrees, IQ’s and other ‘credentials’ are nothing but background noise to the market. 

Those who succeed at trading are masters of themselves. 

Master your own actions and behavior and ability to control them and you will succeed at trading. 

All the books and an IQ of 180 won’t do you any good if you over-trade or risk too much or cannot remain disciplined.

Trading Myth #2

Myth: I’m going to be Rich and I’m Going to Make Money FAST.

Truth: Trading is about not losing money; you must learn to do that if you want to make any…

Perhaps the biggest myth about trading in the general public’s mind, is that it’s all about making money fast. 

High risk, fast money, fast cars, etc. etc. 

The stereotypes that surround trading are so widespread that most beginning traders get into trading due to these stereotypes and so they start off with the completely wrong mindset and expectations. 

These expectations come to a crashing realization once they lose a few trades and reality sets in. 

As the great Warren Buffet so famously said:

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

That’s right, trading is about not losing money much more than it is about making it. 

The reason is, if you want to make money in the markets, you must be a risk manager more than anything, a capital preservationist, if you will. If you want to take advantage of big moves in the market you’ve got to learn to preserve your trading capital by biding your time and being patient in the face of constant temptation.

You will be in battle not only against all other traders trading the markets you look at, but also against yourself, which is perhaps the hardest ‘opponent’ to defeat.

 Once you get to the point where you can preserve your trading capital and only use it on trading opportunities that meet your strict, pre-defined criteria laid out in your trading plan, then you will have conquered yourself and you will start taking money from other market participants rather than giving it to them.

Professional traders know this and their goal in order is:

1. Capital Preservation
2. Capital Growth
3. Get Rich Slowly

Amateur Traders in order:

1. Very Little Regard for Capital Preservation
2. Grow Their Account Fast
3. Get Rich Fast

If you are in the Amateur Trader camp and have this mindset around your trading, the ONLY thing that is going to happen is - you will stay poor or get poorer faster.

Trading Myth #3

Myth: You must have perfect timing to make money in the markets to pick highs and lows exactly.

Truth: Trading is not about picking the highs and lows; it’s about reading the charts from left to right!

You don’t have to pick exact market turning points to make money trading like many people think. 

Yes, you do have to read the chart, and understand what it’s trying to tell you. 

You then look for price action signals that ‘make sense’ with that chart’s story.

We are reading the chart and considering the context a potential trade entry forms within, not just trying to pick the exact high or low with no rhyme or reason.

The market often goes higher or lower than we expect it to.

Trying to trade from previous highs or lows really is unnecessary as there are many good potential trade setups that form long before price reaches a previous high or previous low.

As mentioned previously, as long as a price action signal forms within the context of the market (trend for example) you more than likely have a high probable trade on your hands, which you can capture whilst price is moving TOWARDS the previous high or low.

Trading Myth #4

Myth: You need a lot of money to stand any chance at making money in the market.

Truth: You don’t have to have a lot of money to start, a good trader can make money regardless of account size!

Often, traders believe that to succeed at trading they need a big trading account.

This is simply not true.

In fact you can lose money on a big trading account just as fast as you can on a small trading account.

It’s best to start with a smaller account even if you have a lot of money to trade with.

Will a large trading capital reserve allow you to make more money faster? 

Sure. 

But if you don’t know what you’re doing you can also lose that money faster.

The strategies, skills, and mental attitudes you need to succeed at trading will work on a small account the same as a big account.

It’s always best to start on a small account and hone your skills, then when you’re ready you can deposit more money if you have it or just keep building that small account.

If You Can’t make Money on a $1000.00 Account, 

You Won’t Make Money on a $10,000.00 Account.

Don’t be in a rush! 

If you build a track record of successful trading on a live account, even a small one, you are and will continue to be a successful trader. 

Building a successful live account track record over a period of a year or more is something that FEW people can do. 

If you do that, even on a small account, your success will snowball.

Trading Myth #5

Myth: You have to know what is going to happen next in a market to make money.

Truth: You don’t have to be right or know what will happen next to make money, you must understand that you can never know for sure what will happen!

One huge myth about trading is that to make money you must know what will happen next.

 This couldn’t be further from the truth and in fact, it’s not even possible.

 Part of trading is that there is a random expectation for any one trade you take.

Meaning, any individual trade, has essentially a random outcome.

 This is because there are thousands, maybe even millions of variables affecting a market at any given day at any given time. 

As a result, a trade really can go in either direction, even if you believe you are 100% right about it.

Where your trading strategy or trading edge comes in, is that over-time, given enough trades, if you follow your strategy with discipline, it will play out in your favor.

 Most trading edges or strategies are simply taking advantage of repetitive market patterns that form because of repetitive human interactions with the market.

This is commonly referred to as “Price Has a Memory”.

So, whilst your trading edge might have a 60% win rate, any singular trade has essentially a 50/50 chance of working out.

 So, don’t start convincing yourself “I’M RIGHT!” about your next trade because you’ll start risking too much and getting too emotionally attached to that trade, which is a recipe for disaster.

Instead, realize and understand that trading is a random distribution of winners and losers, which essentially means what I described above. 

For any given trading edge or strategy, over time and over a large enough sample size of trades, that trading edge will show a randomly distributed pattern of wins and losses.

 So, whilst you do need confidence in your trading ability and chart reading skills, you cannot afford to become convinced you are ‘right’ about any one trade, and you must always remember that ANY trade can be a loser.

Trading Myth #6

Myth: You need a high percentage of your trades to be winners to make money.

Truth: You don’t have to win a high percentage of your trades; you must maximize your winners instead!

You’ve probably heard of risk to reward but do you really understand their power? 

If you did know the power of Risk to Reward you know you don’t need to win all your trades to make a lot of money in the market, in fact, you don’t even need to win most of your trades!

 How is that possible you ask? 

By understanding and effectively utilizing risk reward ratios.

Let’s say you set a risk reward of 1:3 for every trade you take. 

That means, you risk 1R where R = dollars risk to make 3R or 3 times your dollars risked.

 At this risk reward ratio, you only need to win 25% of your trades to breakeven and about 27% of them to make a profit (after commissions / spreads).

Let’s take 100 trades. Say you lose 70% of them that would be 70 out of 100; you have lost 70R which for example's sake we will say is $700 or $10 per trade ($10 = 1R).

Now, if you have a 1:3 risk: reward, you are making $30 on all your winners, but you only had 30 winners, right?

However, that is still $900.

 So, you lost $700 but made $900, profit of $200 even though you lost 70% of the time!

Risk reward ratios: You only need to win 27 – 30% of the time to make money if your winners are 1:3.

 With a 1:2 risk reward you only need to be right about 42% of the time.

 Traders get caught up in trying to win on every trade, but this is a fool’s game, very stressful / time consuming and simply not possible.

A 50%-win rate, which is totally possible if you’re a master of price action, can make you a very large sum of money each year by trading with a 1:2 or 1:3 risk reward.

 Most traders believe they must win at a very high percentage, but it’s simply not accurate.

Trading Myth #7

Myth: Automated trading robots or indicators (systems) are the ticket!

Truth: Not if you want to succeed long-term or on any level of magnitude…

All you need to do is read some of the Market Wizards books and you will quickly realize that most of the world’s greatest traders are not buying Forex trading robots and simply loading them onto their computers and getting rich.

This pipedream sold by computer programmers who know almost nothing about how to read the charts, is a huge trading myth.

Any mechanized trading system or algo-trading method is going to fail over time. 

Trading conditions change frequently and even rapidly. 

It takes an experienced, educated, and skilled human mind to discern between good trading conditions and bad.

 If trading was as easy as installing some software on your computer and pushing the buy or sell button when the software tells you to, everyone would be a billionaire.

Think about the most famous traders and investors you know: Warren Buffet, George Soros, Paul Tudor Jones, any of the traders in the Market Wizards books; they are using their minds not trading robots.

Don’t fall for the hype, learn to trade properly and then use your mind to make trading decisions.

 Hope these tactical trading truths and myths bring more clarity in your vision!

I’ll see you next Friday.

Till then, keep trading and have a wonderful weekend!

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